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Debt to Equity and Share Premium Account

Debt to Equity and Share Premium Account

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I have a client that started off very small and will shortly be outgrowing my services but, for my sins, I am still being asked for advice and here is the dilemma (probably a very common one for firms attracting investment):

There are currently 3 shareholders in the company and two more coming on board in the latest funding round.

The two incoming shareholders will first be buying a 5% stake each and then acquiring between 7% and 10% sweat equity for their services over the next year.

The 3 existing shareholders and 1 incoming shareholder have also lent the company varying levels of funds which at some point will probably need to be converted to equity.

I therefore have the following questions:

1) Can the loans be dumped straight into a share premium account without having to issue any additional ordinary share capital?

I don't really want to mess around with the share numbers if I don't have to as they all have different loan values and different equity holdings at the moment.

2) What happens to the share premium account on the future sale of the company e.g. when it is, say, bought by another company for £1m?

The shareholders with the loans say they do not expect the money back until such time as an onward sale of the entire company but it is unlikely future investors will want them on the balance sheet. If they are moved to share premium account will they ever see that money again or is it gone for good.

Thanks,

Dave.

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By bill turpin
13th Sep 2012 11:47

Dave

Share premium accounts can only be used (i) to write off expenses/commissions on the issue of the shares (i) to issue fully paid up bonus shares.  So the short answer to your questions are:

1) No you can't do this

2) Any transfer of ownership of the shares whether to other individuals or to another company is a transaction that is external to the company, so the share premuim is not affected and stays the same.

Usually, where a company is being sold that has outstanding loans to the existing shareholders, then the deal is structured so that part of the sale price takes into account repayment of those loans. For instance, if the purchaser decides the business is worth £1m on a debt free basis and directors are owed £100K, then the deal may be structured that they receive £900K consideration for the sale of the shares plus £100K repayment of their loans. This would be advantageous from a tax point of view because the taxable gain would be reduced.

Structuring the sale of businesses can get complicated, but I hope this helps.

bill

 

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Replying to Red Leader:
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By Tickers
06th Jun 2013 09:38

Accounting for share premium

bill turpin wrote:

Dave

Share premium accounts can only be used (i) to write off expenses/commissions on the issue of the shares (i) to issue fully paid up bonus shares.  So the short answer to your questions are:

1) No you can't do this

2) Any transfer of ownership of the shares whether to other individuals or to another company is a transaction that is external to the company, so the share premuim is not affected and stays the same.

Usually, where a company is being sold that has outstanding loans to the existing shareholders, then the deal is structured so that part of the sale price takes into account repayment of those loans. For instance, if the purchaser decides the business is worth £1m on a debt free basis and directors are owed £100K, then the deal may be structured that they receive £900K consideration for the sale of the shares plus £100K repayment of their loans. This would be advantageous from a tax point of view because the taxable gain would be reduced.

Structuring the sale of businesses can get complicated, but I hope this helps.

bill

 

 

Sorry for dragging up an old thread but what is the position where a company transfers shareholding in one company to another. For example company A transfers 100 shares in Company C valued at £1000 to company B. Can anyone tell me what the accounting treatment is and under what standard for FRS?

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By Dave Paveley
13th Sep 2012 14:28

Great - thanks Bill.

As an aside, can bonus shares be issued to one shareholder only?

One of the shareholders has in their agreement that his percentage will be undiluted after the first round of funding. The only way I can see to do this and preserve his EIS status is to issue a bonus to him only.

Is this allowed?

Obviously a rights issue holder does not have to take up their rights so I was thinking a bonus issue recipient may not have to accept his new shares either?

 

(And I appreciate this client now needs better paid advice. I am in the process of moving them on but they do still keep coming at me with questions in the meantime..)

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Replying to stepurhan:
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By bill turpin
13th Sep 2012 14:46

A bonus issue will apply to all members of that particular class of share. So as you suggest, the way round this would be to get the other shareholders to formally waive their right to receive their bonus shares (a signed letter from each shareholder to the company would suffice). 

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By Dave Paveley
13th Sep 2012 16:29

Thanks Bill.

I will pass that advice on.

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