Buying into a business

[rob900]

My apologies in advance for what will appear to be some rather banal questions but not my area of expertise!
A colleague of mine runs a successful ltd company 50/50 with his business partner. Their personal relationship has deteriorated to the point where they barely talk. His partner wants to retire and I am hoping to replace him as the other director. I have met the other partner and everything is on the table and amicable (at the moment at least). We are currently in the process of going though the 'fair value' process to determine the value of the business and what it will cost to buy him out. I have already stated that I am unable to afford the full 50% but can offer perhaps 10% depending on valuation (the plan is the company would buy the remaining 40%). My questions is is it actually necessary to own a certain amount of the business in order to be able to join as a salaried director? A lot of importance is being placed on the 10% minimum buy in figure but is this to just show commitment or is there some legal basis for this?
Thanks
Rob

[yorkshirejames]

Rob, being a shareholder and being a director are two completely different things.

Thus you can still work for the company being both, neither, just a shareholder, or just a director.

If it is a profitable business, and you feel that you as an individual can use your skills to bring about improvements then go ahead and buy-in.

I can imagine perhaps that your colleague wants this to be a successful, long term arrangement, hence why he is proposing the investment.

If you do go ahead and invest, make sure you go see a solicitor/accountant before you sign.

[rob900]

Thanks for you reply and clarifying the shareholding/director issue which is as I thought to be the case.
However my colleague seems to be fixated on a figure of 10% buy in which he seems to believe is some sort of significant benchmark - hence my question.
He has in his mind that if 10% of the valuation of the business is beyond my reach then the deal cant happen.
I should point out that he and the business between them could afford to buy out the partner - so although useful - my 10 ish % is not financially critical to the deal.

[obscure]

As mentioned being a shareholder is just an investment. However I believe that, as a shareholder, if you own a certain % (maybe 10 or 15%) you are entitled (if you wish) to have a place on the board of directors or to appoint one. This may be what your colleague is thinking of.

However, you can be a director without owning any shares.

[rob900]

You may well be right. Any idea how I might find out what that % age is?

[mahutchinson]

There is nothing in company law regarding shareholding requirements for directors. The articles are unlikely to mention this either unless they have been custom drafted. It is far more likely to be mentioned in a shareholder agreement and you don't mention that one exists or that you are to sign one. The company can buy back a percentage of the shares but someone will need to understand what they are doing here - there is strict procedure for this and the shares will no longer be in issue (in other words, for example, only 60 shares will be issued instead of 100. The company cannot itself own the 40 shares withdrawn. This is a common mistake that lawyers often make on transfers.

[rob900]

Mike
Thanks for your response. Some water has gone under the bridge and at the moment the situation is as planned to play out as follows.
Currently Directors 1 and 2 own 50% of shares each.
Director 2 resigns and sells 20% of his shareholding to me (thats 10% of total).
I join company as co director.
The remaining 40% of Director 2's shares stay in his hands but are gradually bought from him (as agreed in existing shareholders agreement) over the next 5 years.
Those shares would be bought by the company or optionally by either of the 2 directors depending on funds etc. So a few years down the line the situation might look like - Dircector 1 owns 60%, Director 2 - 25% (We both may have been in a position to be able to increase our shareholding) and the company the remainder.
Does this work given the pitfalls you describe? Again apologies for my apparent ignorance in this area but I'm trying to get to grips with it as fast as I can!
Many Thanks
Rob

[rob900]

Mike
Thanks for your response. Some water has gone under the bridge and at the moment the situation is as planned to play out as follows.
Currently Directors 1 and 2 own 50% of shares each.
Director 2 resigns and sells 20% of his shareholding to me (thats 10% of total).
I join company as co director.
The remaining 40% of Director 2's shares stay in his hands but are gradually bought from him (as agreed in existing shareholders agreement) over the next 5 years.
Those shares would be bought by the company or optionally by either of the 2 directors depending on funds etc. So a few years down the line the situation might look like - Dircector 1 owns 60%, Director 2 - 25% (We both may have been in a position to be able to increase our shareholding) and the company the remainder.
Does this work given the pitfalls you describe? Again apologies for my apparent ignorance in this area but I'm trying to get to grips with it as fast as I can!
Many Thanks
Rob

[mahutchinson]

You can transfer the shares between yourselves as you like so long as you have agreement between yourselves and they are sold for fair value. If the company is buying some back it must 1. also pay fair value for them and 2. redeem them so they cease to be issued. The actual idea is fine although of course the value of the shares will change in the time between each tranche being transferred.

[rob900]

Mike
Many thanks for your reply. Things are moving forward and we now have at least broadly agreed the terms of the buyout. This included a 3 month crossover/handover period which I have now started.
I have had 2 suggestions made to me which I would like to air and would appreciate comments.

1) I am told it would be advantageous to pay a token agreed lower price for the shares I intended to buy and then loan the remainder of their value (in company value terms) to the business - which still provides the means to make the 1st down payment to the outgoing director. A future tax advantage perhaps. I'm not sure...

2) We need to ensure no interference from the out going director - who will still be a shareholder (30% and dropping) for 4 years until fully paid off. In practice, how do we get him to give up his voting rights?

Rob

[David Griffiths]

A couple of observations on the above points.

Firstly, there is no requirement that the transfer of shares be at "fair value" as you are not connected with the outgoing shareholder. Of course, because you are not connected, there is probably zero chance of getting them at anything but fair value.

Secondly, is there any mechanism in place to decide what the value will be for future transactions? I ask this because the value of a 10% shareholding is significantly lower than 10% of the value of the company.

Thirdly, you mention the company buying and cancelling the shares. That is quite possible, but you need HMRC clearance to get the most favourable tax treatment for the outgoing shareholder, and you quite simply won't get that if the transfers are made piecemeal, or if the consideration for the redemption is not paid in one payment.

[mahutchinson]

As stated, the price paid for the shares needs to be fair value or HMRC may take an interest. You can agree part payment with terms stating when and how the remainder is paid but the transfer form must state the whole consideration payable and stamp duty is paid on this figure (unless total consideration is under £1,000 as £5 stamp duty has been abolished - £1,000 x 0.5% = £5.). I don't see how part of the payment can be a loan as this implies you will get it back and it is therefore not part consideration for the shares. You can't force the outgoing director to give up his voting rights but does this matter ? So long as he has at least 26% he can block special resolutions but were you intending passing any ? For any ordinary resolutions only 51% of votes is required but remember all day to day decisions concerning the business are taken by the directors by resolution at board meetings and not the shareholders. The directors also (initially at a board meeting) decide what resolutions to offer up to the shareholders to pass.