Selling shares in a limited company

Selling shares in a limited company

Didn't find your answer?

A client (closed company) is selling 35% shares to his friend. The friend had been previously been advising the company and has spent a great deal of helping them to a tune of £25,000 which will be kept in the company and seen as payment for the shares.  The friend will become a non executive director.  There is only one other director in the company

What is the process for selling shares

1) Valuation and perhaps payment by the friend if the shares are more than £25,000

2) Stock Transfer Form and payment of stamp duty

3) Agreement between company and the Non Executive Director on responsibilities drawn up by solicitor  

4) Companies House Annual Return

I probably missed something very important.

They are thinking of setting up a new company instead to make it easier with less admin and just divide the shares 65:35

Thanks

Replies (27)

Please login or register to join the discussion.

avatar
By WhichTyler
09th Oct 2014 13:50

You have missed sthg very important...

I thinkit is the bit where you refer them to an accountant and a lawyer who have the relevant experience & PI cover. 

Thanks (1)
By johngroganjga
09th Oct 2014 14:08

The annual return is required in any event, so that's a red herring here.

No valuation is required.  The parties just need to agree the price and let you know what they have decided.

Thanks (0)
Replying to paul.benny:
avatar
By sanjay100
09th Oct 2014 14:58

undervalue

johngroganjga wrote:

The annual return is required in any event, so that's a red herring here.

No valuation is required.  The parties just need to agree the price and let you know what they have decided.

What happens if the shares are sold below market value or for nothing.

Thanks (0)
paddle steamer
By DJKL
09th Oct 2014 14:26

Who is selling the shares?

 

Is the client (individual existing shareholder) selling 35% of his/her shares or is the company issuing new shares to the investor?

Given the £25,000 costs met, or is it value of work done, presumably for the company, not for the existing shareholder, presume the investor will be invoicing the company for this sum?

You may be clear who is buying from who etc, but the post is not really that clear to me; I may just not see what is actually happening. Subject to answers there may be implications, i.e. Investor being taxed on the £25,000 if it is works done for the company.

I may be seeing a shadow but you say "his friend" not " to a friend of the director" when you say the client (company) is selling, and you don't say the company is issuing shares, hence my concern.

Thanks (0)
Replying to Duggimon:
avatar
By sanjay100
09th Oct 2014 14:57

more clarity

[quote=DJKL]

 

Is the client (individual existing shareholder) selling 35% of his/her shares or is the company issuing new shares to the investor?

Given the £25,000 costs met, or is it value of work done, presumably for the company, not for the existing shareholder, presume the investor will be invoicing the company for this sum?

You may be clear who is buying from who etc, but the post is not really that clear to me; I may just not see what is actually happening. Subject to answers there may be implications, i.e. Investor being taxed on the £25,000 if it is works done for the company.

I may be seeing a shadow but you say "his friend" not " to a friend of the director" when you say the client (company) is selling, and you don't say the company is issuing shares, hence my concern.

[/quote

Its the client (existing shareholder) selling of his shares to the friend. The £25,000 is the value of the work done for the company. 

The area I am little unclear how is how the £25,000 work done is going to be managed as you mentioned best to invoice then convert into shares ?

Yes I too think he would have to be taxed - when he raises the invoice

The company will be selling 35% of the business to the investor hence the existing director will be left with 65% of the shares. There are only two people involved. Currently Ltd company is owned by a director who has 100% interest in the business and his friend whom wants to buy 35% of the business.

Thanks (0)
Replying to Tax Dragon:
paddle steamer
By DJKL
09th Oct 2014 15:45

So to be clear

sanjay100]</p> <p>[quote=DJKL wrote:

 

Is the client (individual existing shareholder) selling 35% of his/her shares or is the company issuing new shares to the investor?

Given the £25,000 costs met, or is it value of work done, presumably for the company, not for the existing shareholder, presume the investor will be invoicing the company for this sum?

You may be clear who is buying from who etc, but the post is not really that clear to me; I may just not see what is actually happening. Subject to answers there may be implications, i.e. Investor being taxed on the £25,000 if it is works done for the company.

I may be seeing a shadow but you say "his friend" not " to a friend of the director" when you say the client (company) is selling, and you don't say the company is issuing shares, hence my concern.

[/quote

Its the client (existing shareholder) selling of his shares to the friend. The £25,000 is the value of the work done for the company. 

The area I am little unclear how is how the £25,000 work done is going to be managed as you mentioned best to invoice then convert into shares ?

Yes I too think he would have to be taxed - when he raises the invoice

The company will be selling 35% of the business to the investor hence the existing director will be left with 65% of the shares. There are only two people involved. Currently Ltd company is owned by a director who has 100% interest in the business and his friend whom wants to buy 35% of the business.

 

" The company will be selling 35% of the  business to the investor."

Okay, what you are really  saying is the existing shareholder keeps his shares, there are just more shares in issue by the company as it is issuing the new shares direct to the investor so that he ends up owning 35% of the company?

Roughly, as I do not do this sort of transaction that often, and always have a handy corporate lawyer to steer my path,, you need to:

1. Check authorised and issued share capital of the company, if need be increase authorised to allow new shares to be issued.

2. Individual investor has either already met company costs, or is invoicing company for his work for company, either way deal with accounting to leave a CR loan balance in name of individual investor.

3.Company issues new shares in exchange for the sum it owes to individual investor.

4. Insofar as individual investor is billing the company for services there is the question of does he already trade in this line of business with others, is he registered as self employed etc and also the value of the works and the tax he needs to pay re these works.

5. Presume individual investor is not currently a connected person with either,existing shareholder/ director  or the company, accordingly price paid for shares is not really a tax issue?

6. Need to consider, if £25,000 if for works, is it fair value for the works; if for costs/ expenses defrayed by individual investor then simpler to be comfortable re value/quantum. 

Is that the outline you envisage?

Thanks (0)
Replying to paul.benny:
avatar
By sanjay100
09th Oct 2014 21:47

Thank you

DJKL]</p> <p>[quote=sanjay100 wrote:

DJKL wrote:

 

Is the client (individual existing shareholder) selling 35% of his/her shares or is the company issuing new shares to the investor?

Given the £25,000 costs met, or is it value of work done, presumably for the company, not for the existing shareholder, presume the investor will be invoicing the company for this sum?

You may be clear who is buying from who etc, but the post is not really that clear to me; I may just not see what is actually happening. Subject to answers there may be implications, i.e. Investor being taxed on the £25,000 if it is works done for the company.

I may be seeing a shadow but you say "his friend" not " to a friend of the director" when you say the client (company) is selling, and you don't say the company is issuing shares, hence my concern.

[/quote

Its the client (existing shareholder) selling of his shares to the friend. The £25,000 is the value of the work done for the company. 

The area I am little unclear how is how the £25,000 work done is going to be managed as you mentioned best to invoice then convert into shares ?

Yes I too think he would have to be taxed - when he raises the invoice

The company will be selling 35% of the business to the investor hence the existing director will be left with 65% of the shares. There are only two people involved. Currently Ltd company is owned by a director who has 100% interest in the business and his friend whom wants to buy 35% of the business.

 

" The company will be selling 35% of the  business to the investor."

Okay, what you are really  saying is the existing shareholder keeps his shares, there are just more shares in issue by the company as it is issuing the new shares direct to the investor so that he ends up owning 35% of the company?

Roughly, as I do not do this sort of transaction that often, and always have a handy corporate lawyer to steer my path,, you need to:

1. Check authorised and issued share capital of the company, if need be increase authorised to allow new shares to be issued.

2. Individual investor has either already met company costs, or is invoicing company for his work for company, either way deal with accounting to leave a CR loan balance in name of individual investor.

3.Company issues new shares in exchange for the sum it owes to individual investor.

4. Insofar as individual investor is billing the company for services there is the question of does he already trade in this line of business with others, is he registered as self employed etc and also the value of the works and the tax he needs to pay re these works.

5. Presume individual investor is not currently a connected person with either,existing shareholder/ director  or the company, accordingly price paid for shares is not really a tax issue?

6. Need to consider, if £25,000 if for works, is it fair value for the works; if for costs/ expenses defrayed by individual investor then simpler to be comfortable re value/quantum. 

Is that the outline you envisage?

Yes that is fine thank you.  Just one last point if the shares are given for free or or at a lower value than the market value of the shares. Would there be capital gains implications for the seller ?

I think they are connected as the friend is already advising the company.

Thanks (0)
David Winch
By David Winch
09th Oct 2014 15:12

Confusion

Let's call the company ABC Ltd, the director Mr X and the new shareholder Mr Y.

What needs to happen is that Mr Y will pay Mr X £25,000 and Mr X will transfer 35% of his shares in ABC Ltd to Mr Y.

The £25,000 does not go to ABC Ltd.

What you are saying is that Mr Y has already done £25,000 of work for ABC Ltd.

So ABC Ltd needs to pay Mr Y the £25,000 for the work (which will be taxable income of Mr Y) and that will help Mr Y to pay Mr X the £25,000 for the shares he will receive.  (Mr X may have a CGT liability on that share sale.)

If Mr X wishes he can then loan the £25,000 to ABC Ltd - leaving the company's bank balance as it was before.

Of course there also needs to be a stock transfer form recording the sale of shares by Mr X to Mr Y.

David

Thanks (0)
avatar
By TerryD
09th Oct 2014 15:17

Confused

Am I to understand that director A (current 100% shareholder) wants to sell 35% of his shares to B (his friend)? If that happens, B owes A the money for the shares (as valued - may or may not be £25,000). The company has not sold any shares. B can invoice the company for the work he did (£25,000), thereby recouping the cost of the shares. Then, yes, you need a share transfer form and will need to update the Annual Return in due course.

EDIT - my typing fingers don't work as fast as other people's!

Thanks (0)
avatar
By TerryD
09th Oct 2014 16:01

@DJKL

I think he's saying it's the existing shareholder who is selling the shares to his friend, not a new issue.

Incidentally, there is no such thing as authorised share capital anymore! A pre-CA2006 company's "authorised share capital" is now deemed to be a clause in its Articles setting a maximum number of shares that can be issued. This can be abolished or amended by ordinary resolution. Then, if there is only one class of share, the directors can allot them.

Thanks (0)
Replying to lionofludesch:
paddle steamer
By DJKL
09th Oct 2014 16:16

I have given up, still confused

TerryD wrote:

I think he's saying it's the existing shareholder who is selling the shares to his friend, not a new issue.

Incidentally, there is no such thing as authorised share capital anymore! A pre-CA2006 company's "authorised share capital" is now deemed to be a clause in its Articles setting a maximum number of shares that can be issued. This can be abolished or amended by ordinary resolution. Then, if there is only one class of share, the directors can allot them.

TerryD, thanks for that re authorised share cap, shows how long since I did anything corporate here;I never liked company law, it was the most boring part of the law course I was forced to endure, delict was far more interesting.(Tort I think down South- snails in bottles etc)

I have got really confused with this whole question, I think it really needs boiled down to:

What does the client really want to achieve?

Is it a sale of part of existing director's holding to new investor, hence company stays the same size re reserves/profits, or is it intended for new investor to enhance the company by contributing his £25,000 of works/costs to it in exchange for shares?

Some of the answers from the OP have implied one/ the other/both!

Thanks (0)
David Winch
By David Winch
09th Oct 2014 16:14

The confusion

I think the OP is perhaps confusing the company with the current director / shareholder.  This is why he says that "A client (closed company) is selling 35% shares to his friend" - which makes no sense.

He could mean either that the current director / shareholder is selling 35% of his shares to his friend or that the company is issuing new shares to the new shareholder so as to leave him holding 35% of the (new & larger) issued share capital in the company.

David

Thanks (0)
David Winch
By David Winch
09th Oct 2014 16:24
Thanks (1)
Replying to Accountant A:
paddle steamer
By DJKL
09th Oct 2014 16:36

Ginger beer never tasted the same after university.

davidwinch wrote:

Donoghue v Stevenson

 

Does somewhat put me of ginger beer.

Refresh your memory if you need to, just don't refresh yourself with ginger beer.

http://www.scottishlawreports.org.uk/resources/dvs/donoghue-v-stevenson-...

Thanks (0)
avatar
By TerryD
09th Oct 2014 16:33

Ah, yes - happy days studying mercantile law for Final Part 1! Sadly, most forgotten now - but Carlisle v. Carbolic Smokeball Co. sticks in the memory for some reason. And I can still recite the definition of a bill of exchange from (s.18 of the 1882 Act, I think)

Thanks (0)
Replying to Wanderer:
paddle steamer
By DJKL
09th Oct 2014 17:07

Old Cases

TerryD wrote:

Ah, yes - happy days studying mercantile law for Final Part 1! Sadly, most forgotten now - but Carlisle v. Carbolic Smokeball Co. sticks in the memory for some reason. And I can still recite the definition of a bill of exchange from (s.18 of the 1882 Act, I think)

Carlill not Carlisle. 

Question of consideration re contract if I recall, which of course in Scotland was not necessary as we had the unilateral gratuitous promise up here. 

It is really strange what sticks in the brain not used for all these years.

Have you ever looked at, Re Polemis & Furniss, Withey & Co Ltd ,re the remoteness of cause and effect? One of my Father's favourites from when he studied law down South.

http://casebrief.wikia.com/wiki/In_Re_Polemis_and_Furness,_Withy_%26_Co.

Thanks (0)
David Winch
By David Winch
09th Oct 2014 16:41

Surprisingly, or perhaps not

Ancient legislation is still commonly the basis of criminal charges in the English Courts (the criminal law in Scotland is different).

So it is every day in court someone will be facing a charge under s18 or s20 Offences Against the Person Act 1861.

David

Thanks (0)
Replying to Micawber:
paddle steamer
By DJKL
09th Oct 2014 17:22

A P Herbert- Misleading Cases/ uncommon Law

davidwinch wrote:

Ancient legislation is still commonly the basis of criminal charges in the English Courts (the criminal law in Scotland is different).

So it is every day in court someone will be facing a charge under s18 or s20 Offences Against the Person Act 1861.

David

David

I have no criminal law knowledge, whilst both my parents were solicitors neither dealt with crime. My Father dealt with two criminal cases in his entire life, one was re poaching and the other was re someone riding a bicycle without lights; probably not quite enough on which to base one's legal memoirs!. I then annoyed him by following a career in Accountancy ,not law. (I was really poor on my Business Law course at university as part of my PG Accountancy course, so probably just as well)

Whilst I appreciate the cases in the above are not real, I believe, per my Father, that they did have a basis in law . On the faint chance you have never read of the exploits of Mr Haddock and the other incidents in the books  I would mention them in the passing as I always enjoyed reading them. (I think they did a TV series with Mr Albert Haddock a long time ago)

Thanks (0)
avatar
By TerryD
09th Oct 2014 17:08

If I were indicted under said Act, could I opt for trial by combat?

Thanks (0)
avatar
By TerryD
09th Oct 2014 17:16

Oh, yes - Carlill (how memory fades....). I've just looked up Polemis - a lovely case, but seemingly disapproved in 1961 by Wagon Mound. Must be time to go home now.

Thanks (0)
avatar
By TerryD
09th Oct 2014 17:32

Haddock

I remember the TV series well - Alistair Sim played (brilliantly) the judge, who seemed to be promoted up the ranks as the series progressed. I think Roy Dotrice played Haddock, but it's Alistair Sim I remember. He was superb on stage, of course, as well as in films and TV - a great loss.

Thanks (0)
Replying to whitevanman:
paddle steamer
By DJKL
09th Oct 2014 17:40

Yes, I think you are right with the actors

TerryD wrote:

I remember the TV series well - Alistair Sim played (brilliantly) the judge, who seemed to be promoted up the ranks as the series progressed. I think Roy Dotrice played Haddock, but it's Alistair Sim I remember. He was superb on stage, of course, as well as in films and TV - a great loss.

Yes, I think you are right with the actors. The other  law based books  I remember reading were the Henry Cecil series, and then of course Rumpole, but neither had quite the same ring as the negotiable cow with a "stamp attached to its dexter horn" and it being "endorsed".

Thanks (0)
David Winch
By David Winch
09th Oct 2014 17:48

Getting slightly off topic but . . .

Have you been watching the Channel 4 documentaries '24 Hours in Police Custody'?

I have found them worth watching - especially the first one (an alleged conspiracy to murder).  The second was a couple of cases of alleged domestic violence / harassment.

David

Thanks (0)
Replying to unearned luck:
paddle steamer
By DJKL
10th Oct 2014 09:33

No, not yet

davidwinch wrote:

Have you been watching the Channel 4 documentaries '24 Hours in Police Custody'?

I have found them worth watching - especially the first one (an alleged conspiracy to murder).  The second was a couple of cases of alleged domestic violence / harassment.

David

David

I read the review which was promising but did not get round to watching; I have a tendency to avoid reality TV as I had to watch so much of it when my daughter lived at home all year round, however this sounds like it may be worth viewing on Catch Up.

Thanks

Thanks (0)
David Winch
By David Winch
09th Oct 2014 22:11

I am sorry, but I do not think you understand this yet.

If, as DJKL is suggesting, the company is going to be issuing new shares to the new shareholder in settlement of the debt owed to him for the work he has done for the company then there is no "seller".  No shares are being sold.

Suppose at present the owner has 100 shares.  Then the company will issue 54 new shares to the new shareholder.  So then there are a total of 154 shares of which the original shareholder has 100 (or about 64.9%).

The company is not issuing the shares for free - it is cancelling the debt for £25,000 which it owes to the new shareholder (which he will have to invoice to the company before the shares are issued if he has not done so already).

That £25,000 he invoices will be taxable income of the new shareholder and is also the cost of his new shares for CGT purposes.

 

But in an earlier reply you did say the existing shareholder was going to sell 35% of his shares to the friend - which is not what DJKL is describing.

That would involve the existing shareholder selling 35 of his 100 shares to the new shareholder.  No new shares would be issued by the company.  That was what I described in my answer at 15:12 today.  It involves the new shareholder paying £25,000 to the existing shareholder.

 

So which is it?

David

Thanks (0)
avatar
By sanjay100
10th Oct 2014 08:24

simple

Out of 100 shares in issue. he is selling 35 shares to his friend and he would be left with 65 shares.

Most likely he will offset the value of the shares against the £25,000 work done but another scenerio is actually giving the shares for free to this friend or perhaps at less than Market Value. I just wondered if there was CGT implications for the seller and if Rollover relief would be available

 

 

 

 

 

Thanks (0)
David Winch
By David Winch
10th Oct 2014 08:39

The difficulty is that the £25,000 worth of work done was done FOR THE COMPANY and the shares are being sold (or given away) BY THE DIRECTOR.

So you cannot simply offset one against the other.

For tax reasons the friend has to bill the company for the work he has done & pay tax on that as his income.  The company then has to pay that debt to him.  He will then pay the money to the existing owner for the 35 shares.  The owner can then lend the money back to the company if he wishes.

An alternative (avoiding the need to pay the money around in a circle) would be for the £25,000 debt due from the company to the friend to be reassigned to become a debt due from the company to the existing owner and the 35 shares to be transferred from the existing owner to the friend in recognition of that assignment.  But the tax consequences are the same (the friend has earnings of £25,000 and the owner has sold 35 shares for £25,000).

David

Thanks (0)