Founders shareholdings - rebalancing options

Founders shareholdings - rebalancing options

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A company started 3 years ago with 4 equal shareholder directors wishes to rebalance the shareholdings to reflect the fact that two of the founders wish to carry on growing the company and two do not.

They have proposed that the 2 non-active shareholders transfer part of their shareholdings to the 2 active shareholders. That approach might have personal tax implications for the individuals – it’s therefore been suggested that instead of transfers between shareholder directors the same effect could be achieved by the non-active shareholders giving back part of their shares to the company for a nil consideration.

Does anyone have any broad thoughts on these two approaches please? The company could be valued anywhere between £100k & £400k.  Obviously professional advice will be taken but thoughts or opinions would be welcomed.

Thanks in anticipation.

Replies (11)

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By TerryD
09th Jan 2015 09:43

Yes - the company can follow the s. 641-644 reduction of capital rules to either cancel or simply repay the unwanted share capital. It's a simple process.

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By User deleted
09th Jan 2015 09:57

Issue

What about a simple issue at par to the founders to uplift % holding?

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By johngroganjga
09th Jan 2015 10:20

Yes a rights issue that the outgoing shareholders don't take up is much simpler than a capital reduction. 

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By bobbuilder
09th Jan 2015 10:41

Rights Issue

Thanks very much for your input - do I understand it correctly that a "rights issue" is an option issued by the company to offer participants the opportunity to buy x shares at y price before a certain date?

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By johngroganjga
09th Jan 2015 10:45

Yes that's what I meant by a rights issue.  But it's to the shareholders as a whole, not just to a subset of them.  So in this case it depends on the other shareholders not exercising their rights, which if the outcome is one that all have bought into should not be a problem. 

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By MBK
09th Jan 2015 13:17

There is a possible problem with the rights issue route...

.... in that it could fall foul of the Employment Related Securities legislation and result in a tax charge on the active shareholders.

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By johngroganjga
09th Jan 2015 13:57

Undervalue

MBK wrote:

.... in that it could fall foul of the Employment Related Securities legislation and result in a tax charge on the active shareholders.

But only if they are issued at undervalue surely?

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By Portia Nina Levin
09th Jan 2015 14:06

Please can you tell me

MBK wrote:

.... in that it could fall foul of the Employment Related Securities legislation and result in a tax charge on the active shareholders.

Which chapter of part 7 would catch this and why? It is relevant to something I have to look at.

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By MBK
09th Jan 2015 15:03

@ John and @ Portia

:@John - I was working from BananMan's suggestion of a rights issue at par - which would appear to be an undervalue.

@Portia : I confess I haven't looked at the technical detail, but I don't think there can be much doubt that the new shares would be made available by reason of the employment. The definition, as we all know, is very widely drawn and we know that founder shareholders are caught.

 

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By bobbuilder
12th Jan 2015 10:14

Yes, possibly at undervalue

Thanks for everyone's thoughts.

If undervalue means less than the value in the sense of the value being "what would a third party pay on average to buy part of the company" (ie including hope-value) then yes it would be a rights issue at undervalue.

If the value was calculated by looking at the balance sheet at the time of issue then maybe not.

Am I correct in saying that the consensus here is that TerryD's proposal is the correct way ahead?

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By bobbuilder
15th Feb 2015 13:37

Conclusion?

Does anyone have a conclusion on this please, now that the frantic month of January has passed?

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