Share this content
0
610

Restructuring company to remove shareholder.

Didn't find your answer?

Search AccountingWEB

A 27% shareholder of an insolvent company has resigned as a director and is not intending to have anything further to do with the company, but is not willing to transfer his shares.

The remaining shareholders / directors want to continue trading, preferably under the same name (or very similar), hoping to be able to turn things around.

Can the company be restructured to effectively remove the 27% shareholder so he cannot benefit - if the company does manage to become solvent?

Does the company have to go through a liquidation?

Thanks

Replies

Please login or register to join the discussion.

09th Apr 2019 13:37

This is really a legal question. Unless there is a shareholders' agreement in place then it is likely to be difficult if not impossible to simply remove the dissenting shareholder.

Thanks (0)
avatar
09th Apr 2019 13:43

slightly OT but why are they trading while insolvent?

Thanks (1)
avatar
to WhichTyler
09th Apr 2019 13:49

The company is being supported by another company, owned by shareholders of this company.

Thanks (0)
avatar
09th Apr 2019 13:51

So the other shareholders see value in the company (otherwise they would presumably start up a new venture) but don't want to pay a significant minority owner anything?

How about they offer the shareholder what they think the shares are worth? Why would he then refuse to sell?

Thanks (0)
avatar
to Accountant A
09th Apr 2019 14:35

Thanks for your reply

The Majority shareholders do see value in the company, and believe they can make it work. But the only way the company can become more than worthless is through the money and effort of the majority shareholders – the minority shareholder is not going to have any further input.

It is probably also worth noting - The company's pretty much only creditor is a company owned by the majority shareholders.

Consequently, rather than forcing the company into liquidation - the company has defaulted on the loan repayments originally agreed – they would like to just continue without a shareholder who will not have any input.

So my question really is - other than offering money for shares, are there any options for removing control or the shares themselves from the minority shareholder?

Due to the company being insolvent, could the assets and liabilities of the company be transferred to a NewCo (with no shares for current min shareholder) without going through a liquidation process? And if so, or for that matter even if it cant, can the NewCo take the new name?

Additionally, the company has large corporation tax losses rolled forward. If the company was to become a NewCo could these losses be carried over?

Thanks (0)
to rae10000
09th Apr 2019 15:15

rae10000 wrote:

So my question really is - other than offering money for shares, are there any options for removing control or the shares themselves from the minority shareholder?

Options are restricted because the "other" shareholders hold less than the 75% necessary to pass a special resolution.

rae10000 wrote:

Due to the company being insolvent, could the assets and liabilities of the company be transferred to a NewCo (with no shares for current min shareholder) without going through a liquidation process? And if so, or for that matter even if it cant, can the NewCo take the new name?

There's potential thin ice with forming a Newco, regarding the directors' fiduciary duty to the existing company. See Regal v Gulliver https://www.aiaworldwide.com/international-accountant/editors-blog/quick...

As you will read, there is a danger that Newco could end up having to hand over its profits to the existing company.

rae10000 wrote:

Additionally, the company has large corporation tax losses rolled forward. If the company was to become a NewCo could these losses be carried over?

:)

Thanks (0)
avatar
09th Apr 2019 13:57

Why does the existence of the shareholder prevent the remaining directors continuing to trade and turn things around? The outgoing one can't withdraw his capital and as he put it at risk (especially gioven the insolvency) doesn't he deserve some of the reward.

He could be diluted into insignificance but depends on the shareholders agreement and/or articles of association.

Or the remainers could buy him out? (as they obviously see some value in the company)

Thanks (0)
avatar
09th Apr 2019 14:42

Just an idle ponder.

Have a rights issue that is taken up by the other company in return for writing down all or part of the loan.This will massively reduce the 27% stake to a level the majority shareholders could live with

Thanks (1)
09th Apr 2019 14:47

Is this by chance a homework question?

I recall Dragons' Den's Hilary Devey teaching the other gurus a trick or two when she haggled for a 26% shareholding of one of the companies she backed.

A 75% shareholding, she explained to the other Dragons, would have been insufficient for her because it would have given the pre-existing shareholders complete control of the company. By controlling 26% Ms Devey would be in a position to block any special resolutions.

Ludicrous?

Thanks (0)
avatar
to I'msorryIhaven'taclue
09th Apr 2019 15:06

There is of course the question of whether a minority shareholder is being oppressed, but a lot of this really relates to how much money is involved and what the personal relationships are. If there isn't much money involved then litigation about oppressing minority shareholders won't happen.

I personally always start from the position of trying to negotiate something by consent. However, there is not enough information to suggest routes for that.

Thanks (0)
avatar
to johnhemming
09th Apr 2019 15:16

Negotiation will no doubt form the solution, but it is also worth planning for a worst case scenario!

The minority shareholder didn’t add any capital originally, and has been remunerated for his time during the short period the company has been operational.

Thanks (0)
to johnhemming
09th Apr 2019 15:22

johnhemming wrote:

I personally always start from the position of trying to negotiate something by consent. However, there is not enough information to suggest routes for that.

Spoken like a true Brexiteer!

Thanks (1)
avatar
to I'msorryIhaven'taclue
09th Apr 2019 21:22

I'msorryIhaven'taclue wrote:

Spoken like a true Brexiteer!


Error code 2016. Does not compute.
Thanks (0)
avatar
to I'msorryIhaven'taclue
09th Apr 2019 15:20

Well definitely not a homework question! But that is basically my thinking –

Ie lack of a 75% majority by the majority shareholders will mean they are unable to disapply the pre-emption rights of the minority shareholder. So the majority cant dilute his shareholding without his permission.

This also goes for the rights issue.

It seems to me the solution revolves around the fact the company is insolvent. It is possible to create a new company, with the same name, same majority shareholders and maintain the CT losses?

Thanks (1)
to rae10000
09th Apr 2019 15:19

True on the rights issue, but how much is he going to be willing to pay to take up his rights?

Thanks (0)
avatar
to Wilson Philips
09th Apr 2019 17:08

I'm more thinking he wont agree to a rights issue in the first place, which I think needs to be passed by special resolution (75%).

Thanks (0)
to rae10000
09th Apr 2019 19:01

No - an ordinary resolution would do it.

Section 551(8) of Companies Act 2006.

Thanks (0)
09th Apr 2019 17:26

I suppose the obvious lever on the 27% shareholder is the company's current state of insolvency. It could be difficult for Mr 27% to oppose a move by the remaining directors to have the company declared insolvent.

Are we talking about balance sheet insolvency? Or an illiquid state? Either way, the majority shareholders might tip the balance their way by enforcing the debt owed to their associated company - you stated earlier on in the thread that the majority shareholders owned a separate company which is itself a major creditor.

Thanks (0)
avatar
to I'msorryIhaven'taclue
09th Apr 2019 17:46

Yes technically its just the balance sheet that’s insolvent, but as you mention the majority shareholders could enforce the defaulted debt repayments which would make the company lose all its cash.

I’m worried that if the company became insolvent, in terms of future trading, it would loss the name and CT losses. That’s why ideally it could be restructured or maybe bought out buy a New company, hence keeping the name and also the losses.

Thanks (0)
avatar
By Matrix
to rae10000
09th Apr 2019 19:09

How would you transfer the losses to the new company?

Thanks (0)
avatar
to Matrix
10th Apr 2019 11:40

To be honest I’m not sure…

But maybe something on the lines of:

1 – Newco set up and owned 100% by original majority shareholders

2 – Now this is the bit I’m really not sure about…….. Due to being in default of loan original company shareholders forced to transfer shares to new company.

3 – Original company continues to trade and utilise losses, if possible, and future dividends / funds from possible future sale transferred to Newco (and hence majority shareholders of original company).

Now if there’s just a way to make 2 happen?

Thanks (0)
avatar
10th Apr 2019 09:57

The problem is the 27% holding which means special resolutions can be blocked, including to wind down the company.

However you mentioned that the shareholder (since resigning) is not contributing anything. Well isn't that what most shareholders do? Invest capital (even when rewarded) and hope for a return. They are not involved in the day to day running of the business.

I presume there is no shareholders agreement to govern other conditions.
Unfortunately very little you can do apart from the company trying to buy back their shares, because the pre-emption rights have not been disapplied.

Thanks (3)
Share this content