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Ask Andy – July 2011

Q: I have recently set up a company with a number of business partners and my accountant has recommended we use a Shareholders Agreement.  What are the benefits of this? 

A Shareholders Agreement sets out the rights and obligations of the Shareholders of a company and typically governs areas such as management and structure, its funding process and administration matters.  I would strongly recommend that you enter into a Shareholders Agreement for all of the following reasons:

  • The internal management of the company can be regulated and levels of shareholder approval for fundamental business decisions of the company can be clearly defined

 

  • Definitive procedures can be set out in the event of a disagreement or deadlock between the Shareholders

 

  • Restrictions can be put on Shareholders with regard to the transfer of shares.  Accordingly, the other Shareholders will have comfort as to the identity of those persons with whom they are dealing

 

  • Agreed exit policies can be inserted where Shareholders leave the company.  This allows the company to satisfactorily sever ties with any problem Shareholders who were previously employees/directors.  In addition, defined succession policies can be put in place on the death or bankruptcy of a Shareholder

 

  • The goodwill of the company can be preserved by placing restrictive covenants on Shareholders

 

  • The rights of Shareholders with regard to access to accounts and records of the company can be defined

 

  • Sensitive information of the company can be protected by the Shareholders providing confidentiality obligations

Q:  Following recent difficulties with a Director/Shareholder, our Tax Advisor has confirmed that the best way forward will be for my company to buyback the shares of this shareholder out of profits.  What does this entail and what are the benefits of going down this route?

There are a number of benefits where a company purchases its own shares out of profits.  These include returning surplus cash to shareholders, adjusting the debt to equity ratio of the company and assisting in making the remaining shares in the company more marketable.  In effect, those shares bought are cancelled and the percentage holdings of the ongoing shareholders increase pro rata.  A further benefit is that share buybacks are usually seen as a positive sign by potential investors. 

The procedure for a private company repurchasing its shares out of profits available for dividends is usually completed in accordance with the following steps:

  • The company must have the power in its Articles to re-purchase its shares.  Any rights of pre-emption under the Articles/Shareholder’s Agreement of the company can be satisfied by the shares being firstly offered to the remaining shareholders who then waive their rights

 

  • The share buyback must be approved by a special resolution of its members.  The simplest method is to use the written resolution procedure

 

  • The directors must review the relevant accounts of the company to ascertain whether the company has sufficient distributable profits to buyback the shares.  These accounts should refer to the period relating to the last three months prior to the share buyback.  Stamp duty at 0.5% is payable by the company on the share re-purchase. The company must be mindful of the tax consequences of a share buyback.  This primarily impacts on the departing shareholder as the monies can be deemed to be a payment of income and therefore taxable at the marginal tax rate of the shareholder

 

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