November 22, 2021
When a shareholder wants to sell their shares or leave a small company it can upset the equilibrium of the business.
There are ways to avoid this to ensure that the sale goes smoothly and the remaining shareholders are not disadvantaged.
Reasons for sale
A shareholder may want to move on from the company and sell their shares in order to make a clean break. Alternatively, they may wish to cash in their shares on retirement or divorce or because of personal financial issues. If a shareholder dies, then their estate may wish to sell the shares for the benefit of the beneficiaries.
It will be helpful if the shareholder can advise the directors and other shareholders of the date they would like to leave and why they wish to sell their shares. This can help ensure the sale proceeds in an open and orderly way.
Check the shareholders’ agreement
The shareholders’ agreement will usually set out the correct procedure for selling shares and is likely to include some restrictions. A well-drafted agreement should protect shareholders, for example, by preventing shares from being sold to anyone outside of the company or by specifying that someone’s shares be sold to existing shareholders or back to the company in the event that they leave.
Right of first refusal
A shareholders’ agreement may include the right of first refusal requiring shares to be offered to the directors and/or other shareholders before they can be offered elsewhere. This will allow existing shareholders to buy the shares if they wish without outside competition.
Conditions can be attached to this right such as how the share price will be calculated or the number of shares to be offered to each director or shareholder. The agreement can require that shares be offered to existing shareholders in the same proportions as their existing holdings. For example, someone holding 50 per cent of shares to be offered half of the shares being sold, while someone holding 25 per cent of shares to be offered a quarter of the shares being sold. This can keep the balance of shares and any accompanying control of the business at a similar level as before.
The shareholders’ agreement may also include provision for payment to be made in instalments to help existing shareholders keep control of the shares.
Selling the shares
The share certificate will need to be handed over on a share sale and a stock transfer form completed and signed. Once the sale has completed, it should be recorded in the company’s statutory register.
Tax liabilities may arise for the seller and these should be checked with HM Revenue & Customs.
Ensuring a share sale does not compromise a company or its directors
By putting a robust shareholders’ agreement in place, company directors can avoid difficulties when a shareholder wishes to sell their shares. An agreement can be drawn up sometime after a company has been formed, if one was not put in place at the time of formation, or an existing agreement can be reviewed and amended to offer stronger protection.
Provisions can be included for the forced purchase of shares in certain situations, for example, when a shareholder’s behaviour has not been in the best interests of the company.
It is advisable to review any shareholders’ agreement from time to time to ensure that it protects the company’s rights and interests.
At Tayntons we can advise you in respect of share sales and shareholders’ agreements.