Avondale Guide - Company Buybacks and Minority Shareholding Buybacks - Free Business Guides

  • 4,447 views
Uploaded on

What happens when a shareholder wants to exit? How can a value be arrived at for a minority shareholding and what is the best way to structure a deal? If there is no shareholders' agreement stating …

What happens when a shareholder wants to exit? How can a value be arrived at for a minority shareholding and what is the best way to structure a deal? If there is no shareholders' agreement stating that shares should be valued pro-rata to 100% negotiations can become intense. Even if there is the 100% valuation, this may not suit the buying party who might struggle to match the ‘open market’ rate, nor feel that this reflects the sweat equity that has led to the parties' current position. Furthermore how can the buying party afford the shares? This guide looks at the following:
Exit Options
Company Buy Backs
Legal Requirements
Tax and the Buy Back
Employing an Adviser
Minority Shareholder Valuations

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
4,447
On Slideshare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
1
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1.       Guide:  Company  Buy  Backs  &  Minority   Shareholding  Buy  backs       www.avondale.co.uk   Page  1  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.     Contents       What  happens  when  a  shareholder  wants  to  exit?  How  can  a  value  be  arrived  at  for  a  minority  shareholding   and  what  is  the  best  way  to  structure  a  deal?  If  there  is  no  shareholders’  agreement  stating  that  shares  should   be  valued  pro-­‐rata  to  100%  negotiations  can  become  intense.  Even  if  there  is  the  100%  valuation,  this  may  not   suit  the  buying  party  who  might  struggle  to  match  the  ‘open  market’  rate,  nor  feel  that  this  reflects  the  sweat   equity  that  has  led  to  the  parties’  current  position.  Furthermore  how  can  the  buying  party  afford  the  shares?   This  guide  looks  at  the  following       • Exit  Options   • Company  Buy  Backs   • Legal  Requirements   • Tax  and  the  Buy  Back   • Employing  an  Adviser   • Minority  Shareholder  Valuations     Introduction   What  happens  when  a  shareholder  wants  to  exit?  How  can  a  value  be  arrived  at  for  a  minority  shareholding   and  what  is  the  best  way  to  structure  a  deal?  If  there  is  no  shareholders’  agreement  stating  that  shares  should   be  valued  pro-­‐rata  to  100%  negotiations  can  become  intense.  Even  if  there  is  the  100%  valuation,  this  may  not   suit  the  buying  party  who  might  struggle  to  match  the  ‘open  market’  rate,  nor  feel  that  this  reflects  the  sweat   equity  that  has  led  to  the  parties’  current  position.  Furthermore  how  can  the  buying  party  afford  the  shares?     This  situation  can  quickly  lead  to  shareholder  disputes.  These  are  akin  to  the  breakdown  of  a  marriage  in  that   no   one   sets   out   in   a   business   venture   or   marriage   hoping   that   it   will   fail.     In   some   circumstances   the   breakdown  of  a  marriage  and  a  dispute  between  shareholders  are  one  and  the  same.    With  blood,  sweat  and   tears  invested  in  both  a  business  and  marriage  it  is  no  surprise  that  emotive  as  well  as  financial  concerns  enter   the  fray  making  for  what  is  often  a  testing  process.    But  what  solutions  are  there  to  enable  shareholders  to  exit   a  business  at  the  end  of  the  working  relationship  that  avoid  the  expensive  vagaries  of  the  court  process?       • The  sale  of  the  business  to  an  external  buyer  is  certainly  an  option.    Trade  buyers  can  usually  pay  more   than  the  incumbent  parties  can  afford.  Both  parties  gain  from  a  tax  beneficial  position  and  non-­‐instigating   party  may  even  be  able  to  look  at  other  ventures  and  continue  trading  in  some  way  after  a  deal.  Many  of   course   are   reluctant   to   do   this   and   therefore   a   buyout   may   be   the   best   option.     See   our   guide   to   valuations  and  sales.   • Winding  up  the  business  is  often  an  undesirable  option  as  goodwill  will  not  be  realised  benefiting  neither   party   • A  company  buy  back  may  be  the  most  attractive  as  in  the  best  scenarios  it  allows  one  of  the  conflicting   parties  to  exit  whilst  realising  the  true  value  of  their  stake  in  the  business.  See  below.   • Employing  an  adviser  to  arbitrate  valuation  and  negotiation  between  the  parties.   Company  Buy  Backs   If  an  internal  buy  out  is  to  be  struck  the  company  buy  back  is  potentially  an  excellent  prospect.  The  concept  of   a  company  buy  back  is  not  a  difficult  one:    The  company  is  simply  buying  back  one  of  the  parties'  shares  which   are  then  cancelled,  leaving  the  other  party  (or  parties)  as  the  only  remaining  shareholder(s).    Of  course  it  is   dependent  on  one  of  the  parties  being  prepared  to  allow  the  other  to  continue  the  business  and  benefit  from   the  goodwill  that  the  business  may  have  built  up  over  time  (i.e.  where  one  party  is  not  intending  to  work  in  the   particular  industry  of  the  company  anymore  and  only  wants  to  see  a  return  on  their  investment  of  time  or   money,  or  where  one  of  the  parties  does  not  believe  there  is  much  goodwill  invested  in  the  business  itself).    
  • 2.   Guide:  Company  Buy  Backs  &  Minority   Shareholding  Buy  backs                                       www.avondale.co.uk   Page  2  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.       A  key  advantage  to  structuring  a  deal  in  such  a  way  is  that  because  the  company  is  purchasing  the  shares,  a   larger  sum  for  the  shares  is  often  more  achievable  than  if  an  individual  were  to  purchase  the  shares.    Secondly,   the  remaining  shareholder(s)  do  not  have  to  extract  the  available  funds  from  the  business  (thereby  incurring   tax  charges)  in  order  to  pay  the  outgoing  shareholder(s)  as  they  may  have  to  if  they  were  to  purchase  the   shares  personally.         Logic  may  indicate  that  a  company  buy  back  is  the  best  solution  but  bringing  both  parties  to  the  table  to  begin   reasoned  negotiations  can  be  difficult.    With  so  much  of  the  individual  poured  into  the  business,  emotive  and   personal   issues   may   prevent   the   parties   being   able   to   resolve   the   issue   themselves.     At   this   point   skilled   advisers  may  often  be  introduced  to  break  the  deadlock.         A  key  part  of  the  adviser’s  role  at  this  stage  is  to  highlight  the  potential  problems  that  will  arise  if  the  parties   fail  to  reach  an  agreement.    Compromise  may  be  unpalatable  to  the  parties  but  it  may  be  the  only  way  to   salvage  value  from  a  mutually  destructive  situation.    Of  course,  a  shareholders’  agreement  at  the  birth  of  the   business  might  well  have  resolved  at  least  some  of  the  potential  areas  for  dispute.  But  this  is  not  often  high  on   the  list  of  priorities  of  new  business  partners,  particularly  if  they  are  (or  perhaps  the  word  "were"  is  more   appropriate  by  this  stage)  married  as  well.     Legal  Requirements   Assuming  the  parties  are  able  to  broker  some  form  of  broad  agreement  through  their  advisers,  the  adviser  will   need   to   ensure   that   the   structure   of   the   deal   meets   the   requirements   of   company   law.     There   are   some   important   procedural   formalities   to   follow   when  affecting   a   buy   back.   The   Companies   Act   1985  lays  down  a  specific  procedure  of  a  company  buy  back  of  shares  in  section  164.  Key  points  to  be  aware  of   are:   • the  company's  articles  of  association  must  give  it  the  authority  to  affect  the  purchase.  If  they  do  not   then  the  shareholders  will  have  to  pass  an  appropriate  special  resolution  enabling  it  to  do  so;     • a  special  (and  preferably  written)  resolution  must  be  prepared  confirming  the  company's  authority  to   effect  the  buy  back;     • where  an  extraordinary  resolution  is  used,  the  company's  proposed  buy  back  'contract'  must  be  filed   at  its  registered  office  for  15  days  prior  to  the  resolution  being  passed/contract  being  entered  into   (using  a  written  resolution  makes  this  unnecessary).     • the  shares  must  be  fully  paid  up;     • payment  for  the  shares  should  be  made  out  of  distributable  profits.  The  purchase  may  also  be  made   out  of  capital  (but  it  requires  still  more  stringent  formalities).       Failure  to  observe  the  Companies  Act  requirements  may  make  the  buyback  void  and  legally  unenforceable.   Additionally  the  company  could  find  itself  liable  to  a  fine  and  the  company's  officers  liable  to  both  a  fine  and   imprisonment.     Another  issue  that  must  be  carefully  considered  is  whether  there  are  in  fact  sufficient  distributable  profits   from  which  to  affect  a  buy  back.  This  must  be  clearly  established  before  the  transaction  proceeds.  Often  the   business  owners  or  their  accountants  suggest  that  the  company  pays  the  outgoing  shareholder  money  over  a   period   of   time.   Although   in   fact   there   is   nothing   in   the   legislation   to   prevent   staged   payments   for   the   company's  shares,  it  is  usually  the  case  that  the  consideration  will  have  to  be  paid  in  full  and  at  the  point  of   sale.   If   there   is   any   suggestion   that   the   parties   want   to   pay   in   stages,   a   company   buy   back   may   well   be   inappropriate.  The  outgoing  shareholder  would  have  to  be  asked  to  take  a  probably  unacceptable  risk  that  if   the  company  does  not  have  distributable  profits  at  the  time  a  payment  is  due  they  could  be  left  without  a  legal   remedy  to  insist  on  the  company  making  the  payment.     Tax  and  the  buy  back  
  • 3.   Guide:  Company  Buy  Backs  &  Minority   Shareholding  Buy  backs                                       www.avondale.co.uk   Page  3  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.     Tax  concerns  are  also  often  the  biggest  factor  in  the  decision  to  use  a  company  buy  back  of  the  outgoing   partners'  shares.  Providing  certain  conditions  are  met  the  proceeds  received  from  the  buyback  may  be  treated   as  a  capital  transaction  (liable  to  capital  gains  tax,  which  can  be  useful  if  the  parties  qualify  for  Capital  Gains  tax   relief).  However,  clients  are  well  advised  to  take  specialist  tax  advice  on  the  precise  tax  implications  of  a  buy   back  and  to  do  so  in  good  time  before  the  transaction  is  too  far  advanced.  It  is  usually  also  advisable  to  seek   revenue  clearance  on  this  type  of  transaction  and  this  must  be  factored  in  to  the  planning  of  the  timing  of  a   deal.  The  Revenue  can  take  up  to  28  days  to  reply  to  a  request  for  clearance.     Employing  an  adviser   Understanding  the  issues,  which  may  be  broad  and  complex,  commercial  or  personal,  is  essential  to  handling  a   successful  share  buyback.  Avondale  can  assist  both  with  valuations  and  negotiations.  Utilising  expert  advice   usually   avoids   disputes   escalating.   Skilled   arbitrators   create   a   buffer   between   the   parties   to   enable   a   commercial  reality  to  set  in.  Through  their  expertise  in  this  area  Avondale  have  a  history  of  resolving  potential   disputes  and  delivering  successful  transactions  through  practised  and  sensitive  share  buyback  negotiations.   Fees  vary  from  project  to  project  so  please  contact  us  for  a  full  understanding  of  how  Avondale  can  assist  in   adding  value  in  this  area.         Financial  advice  regarding  the  specifics  of  a  company  buy  back  should  be  taken  from  your  usual  regulated   advisors.       Minority  Shareholder  valuations   If  a  minority  Shareholder  in  a  private  limited  company  wishes  to  sell  his  shares  he  may  well  find  that  it  is   impossible   to   sell   them   on   the   open   market   and   he   may   be   as   a   result   at   the   mercy   of   the   continuing   Shareholders  who  may  or  may  not  be  prepared  to  pay  a  "fair  price".    It  is  often  not  appreciated  how  little  a   minority  shareholding  may  be  worth  in  the  absence  of  an  arrangement  (in  the  Articles  of  Association  or  by  way   of  Shareholders  Agreement)  that  such  shareholding  shall  be  valued  at  a  pro  rata  fraction  of  the  value  of  the   Company  as  a  whole.    For  majority  stakeholders  seeking  a  transaction,  minority  shareholders  can  form  a  major   barrier  and  it  is  well  to  examine  their  position  early  on.  Whilst  every  valuation  must  depend  on  its  own  factors   so  that  it  is  impossible  to  generalise  nevertheless  case  law  suggests  minority  shareholders  not  valued  pro-­‐rata   in  a  shareholders  agreement  be  valued  at:-­‐     • A  25%  shareholding  in  a  Company  may  be  valued  at  5%  of  the  value  of  the  Company  as  a  whole.     • A  49%  shareholding  in  a  Company  may  be  valued  at  20%  of  the  value  of  the  Company  as  a  whole.     • A  55%  shareholding  in  a  Company  may  be  valued  at  44%  of  the  value  of  the  Company  as  a  whole.     • A  75%  shareholding  in  a  Company  may  be  valued  at  75%  of  the  value  of  the  Company  as  a  whole.       We  suggest  that  anyone  who  is  considering  becoming  a  minority  shareholder  in  a  private  limited  company   should  consider  the  following  questions:-­‐     1.   Do  the  majority  of  the  Shareholders  agree  that  each  of  you  will  exercise  your  voting  power  in  the   Company  to  ensure  that  certain  named  individuals  will  be  the  directors  of  the  Company?   2.   Is  it  agreed  that  the  appointment  of  any  new  Director  will  require  the  approval  of  all  of  you?   3.   Is  it  agreed  that  every  Director  of  the  Company  shall  be  a  Shareholder?   4.   Is  it  agreed  that  any  Director  who  ceases  to  be  a  Shareholder  shall  forthwith  cease  to  be  a  Director?   5.   Should  any  Director  who  resigns  his  directorship  or  who  becomes  disqualified  from  being  a  Director   be  forced  to  sell  his  shares  to  the  other  Shareholders?   6.   Should   all   Directors   be   paid   the   same   and   if   not   should   the   Directors   by   majority   vote   be   able   to   decide  upon  the  remuneration  to  be  received  by  each  Director?  
  • 4.   Guide:  Company  Buy  Backs  &  Minority   Shareholding  Buy  backs                                       www.avondale.co.uk   Page  4  of  4   01737  240888     This  guide  is  not  definitive.  Accuracy  is  not  guaranteed  and  it  does  not  replace  professional  advice.     7.   Should  each  of  the  Directors  devote  his  full  time  and  attention  to  the  business  of  the  Company?   8.   Will  the  Directors  all  have  Service  Contracts  with  the  Company?   9.   Will  any  Managing  Director  or  Chairman  have  a  casting  vote  at  Directors  meetings?   10.   How  many  Directors  will  need  to  be  present  at  a  Directors  meeting  to  constitute  a  quorum?   11.   Will  the  Directors  agree  not  to  compete  with  the  Company  nor  poach  its  customers  nor  divulge  its   trade  secrets  both  during  the  time  that  they  remain  Directors  and  during  a  period  of  say  one  or  two   years  thereafter?   12.   If  any  Director  has  to  give  personal  guarantees  to  the  Company's  Bankers  or  Landlords  do  the  other   Directors  agree  that  any  liability  will  be  shared  by  them  all  equally?   13.   Is  it  agreed  that  no  party  will  seek  to  quit  as  a  Director/Shareholder  for  a  minimum  specified  period?   14.   Is   it   agreed   that   the   consent   of   all   will   be   required   before   the   Company   can   launch   into   any   new   business  venture  which  is  substantially  different  from  that  presently  proposed  or  before  Company  can   increase  its  share  capital  or  borrowing  in  excess  of  a  specified  sum?   15.   On   the   occasion   of   any   future   allotment   of   new   shares   in   the   Company   should   each   existing   Shareholder  have  the  Option  to  subscribe  for  shares  pro-­‐rata  to  preserve  his  relative  voting  power?   16.   Should   any   Shareholder   be   free   to   transfer   his   shares   to   whom   so   ever   he   pleases   or   should   the   continuing  Shareholders  have  the  option  to  buy  the  shares  of  any  Shareholder  wishing  to  sell?   17.   Bearing  in  mind  that  a  Shareholder  may  find  it  impossible  to  sell  a  minority  shareholding  on  the  open   market   should   the   continuing   Shareholders   be   obliged   to   purchase   the   shares   of   any   Shareholder   wishing  to  sell  his  shares  subject  to  the  proviso  that  if  the  continuing  Shareholders  cannot  afford  the   shares  themselves  or  cannot  find  Purchasers  for  the  shares  they  will  concur  in  a  sale  of  the  Company   as  a  whole  or  the  liquidation  of  the  Company  if  necessary?   18.   On   what   basis   should   the   price   to   be   paid   for   a   shareholding   be   calculated?     Should   a   25%   shareholding  for  example  be  valued  at  25%  of  the  value  of  the  Company  as  a  whole?    If  shareholdings   are   to   be   valued   by   reference   to   the   value   of   the   Company   as   a   whole   should   the   value   of   the   Company   as   a   whole   be   determined   by   the   Company's   Auditors   as   experts   or   by   a   more   specific   formula  related  to  the  profits  and/or  assets  of  the  Company?   19.   If  the  price  to  be  paid  for  a  shareholding  is  likely  to  be  substantial  should  the  purchasing  Solicitors  be   allowed  to  pay  the  price  with  interest  by  way  of  instalments  over  a  specified  period?   20.                  A   transmission   of   shares   occurs   when   a   Shareholder   dies   or   becomes   insane   or   bankrupt.     On   the   occasion  of  a  transmission  should  the  continuing  Shareholders  have  the  option  or  the  obligation  to   buy  the  shares  in  question?    The  same  considerations  as  are  mentioned  in  paragraph  17  above  with   regard  to  Share  Transfers  are  relevant  to  the  question  of  transmissions.   21.   Do  you  agree  that  the  consent  of  all  of  you  should  be  required  for  any  alteration  of  the  rules  of  the   Company  i.e.  the  Articles  of  Association?   22.   Can  you  agree  now  on  a  dividend  Policy  for  the  Company  or  are  you  happy  for  the  Directors  to  decide   the   matter   from   time   to   time?     You   could   decide   now   that   a   specific   Percentage   at   least   of   the   Company's  profits  after  tax  shall  be  distributed  each  year  by  way  of  dividend  to  the  Shareholders.   23.   It  is  agreed  that  all  Contracts  to  be  entered  into  by  the  Company  will  be  negotiated  on  an  arm’s  length   basis  and  at  competitive  prices?     Having  considered  the  above  questions,  one  needs  to  look  at  the  existing  Articles  of  Association  of  the   Company  to  check  the  present  provisions  with  regard  to  such  matters  as  Share  Transfers,  pre-­‐emption  rights,   transmissions  and  allotments  of  new  shares.    The  security  of  a  minority  Shareholder  will  depend  on  a   satisfactory  interplay  between  the  provisions  of  the  Company's  Articles  of  Association  and  the  provisions  of  a   Shareholders  Agreement.