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Possibility of 2nd payout for sale of shares

Possibility of 2nd payout for sale of shares

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Small Company with 5 shareholders in 4th year of trading. 4 shareholders working in business are trying to get the 5th shareholder to sell up as he has no active involvement in business and they are now taking grievance with the other shareholder recieving a profit share from their hard work....(the 5th shareholder was originally meant to be involved in the day to day running of the business but this hasnt happended).. 5th shareholder would be willing to sell  his shares however he has heard rumours a competitor may be interested in buying the business in the near future but other shareholders are keeping information from him and he will  lose out if the business is sold. He is looking to agree a price for selling his shares to the current shareholders but wants to do so with a sell on clause that he would receive 5% of any future sale of the business.and the shareholder looking to purchase his shares is open to this idea. I was therefore wondering if this is fairly straightward and could agreed in a contract of sale of the shares with any future payout deemed a second part of the sale and subject to CGT.


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By johngroganjga
03rd Apr 2017 13:03

Yes it's perfectly possible, but the devil is in the detail, and of course the detail in something like this is a job for lawyers not accountants.

I suggest you assist the parties to draft heads of agreement incorporating those terms and then send them off to their respective solicitors.

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Replying to johngroganjga:
By Avant-Garde54
03rd Apr 2017 13:54

Great. Thanks for the advice....I will do as suggested.

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By Montrose
04th Apr 2017 19:08

As johngroganjga advises, see a lawyer for drafting-there is nothing difficult about such a share of the action provision being incorporated in a share sale agreement. The tax is more complicated, as the prospective payment has to be valued and subjected to CGT at the date of the share sale[Marren v Ingles]-presumably it will qualify for Entrepreneurs' Relief if vendor was director/emploee of the company.

Any proceeds in excess of this value would be separately subject to CGT but would not, I believe, qualify for Entrepreneurs relief, as they are profits not on a share sale but on a chose in action.
This could b avoided if there were a cap on the share of the action payment, but this would necessitate initial payment of CGT on that cap[with the benefit of Entrepreneurs relief] with a retrospective adjustment downwards when the final amount if less than the cap is known

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