Options to Exit a Dessenting Shareholder

Answer:

The situation you describe is a classic Company Purchase of Own Shares (CPOS) scenario.  If the company is able to purchase the dissenting shareholders shares back this will leave the remaining 3 shareholders with an equal 33% shareholding in the company.  Although the company will be worthless, they will own a greater share of it effectively leaving them in exactly the same position, but without the dissenting shareholding.

The existing shareholder will want to make sure that the money that he receives for his shares is taxed as a capital gain (10% possibly) and not as income (38.1% possibly) as were he able to sell the shares on the open market, the transaction would be taxed as a capital gain.  HMRC however have a body of Anti-Avoidance Legislation to make sure that only genuine capital transactions are taxed as such and a CPOS situation is fraught with difficulty.  There are several conditions that must be complied with to obtain capital gains treatment from the purchasing company’s perspective which centre around the transaction being for the benefit of the company’s trade.

HMRC go on to set out situations in which they consider the commercial interests of the company are satisfied and one of these is a shareholder disagreement which your situation seems to fall into

From the vendor’s point of view, there are 5 conditions which must be met, the most important ones being that the shares must have been owned by the vendor for 5 years, the vendor cannot be ‘connected’ with the company post-sale and that the purchase of the shares by the company should not be part of an arranged scheme which essentially leaves the vendor or one of his associates continuing to have an interest in the company in the period within one year of the transaction.

Having overcome the tax hurdles, there are Company Law requirements to be satisfied and I would urge you to ensure that you instruct a solicitor well versed in Company Law and ideally someone who has undertaken a number of CPOS transactions in the past before embarking on this plan.

The main Company Law rules are that the company must have the power to buy its own shares back, which will be found within the Articles of Association of the company and it must have enough distributable reserves (retained profit) to make the purchase.

Having satisfied the tax and Company Law requirements the procedure to effect the purchase should be strictly adhered to and involves obtaining advanced clearance from HMRC that the transaction qualifies as a capital transaction, the transaction must be approved by the shareholders via an ordinary resolution, the transaction must be stamped with the Stamp Office in Birmingham and a number of documents must be filed with Companies House.

Provided all of the above matters are adhered to, it will be possible to exit the dissenting shareholder in your company in a manner that provides him with the same capital gains tax treatment as he would have received on a sale to a third party. Importantly however,  by going down the CPOS route, you and your fellow remaining shareholders have avoided the entry of an unwanted shareholder into your company and you have increased your interest from 25% to 33% without having to utilise personal funds.

The advice in this column is specific to the facts surrounding the questions posed.  Neither FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.