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

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.