A Director has stepped down

[Siren]

We're a limited company. We have three directors and one of them decided to leave the company. All forms have been filed, so he is gone, leaving two directors.

We had a set amount of wages that we agreed to pay each Director. However, he is also asking for a third of the company's profits.

He also says money that is paid to him is no longer a profit and therefore not taxable, which we understand, but he does not feel he is responsible to pay company taxes for the months he was with us. He wants one third of everything, even though he put in the least amount of time.

There were never any agreements signed.

Anyway, we are waiting for advice before we agree to pay him anything, but is he legally entitled to a third of the profits?

Thanks in advance.

[Mattonella Tile Studio]

Is this person a shareholder? If so, in what proportion were the shares allocated?

[Siren]

He was a shareholder. He had 34 shares. We purchased them from him when he stepped down as director, so now myself and my partner have those shares and have split them evenly.

[Mattonella Tile Studio]

Regarding the company tax, he isn't responsible for paying any, neither are you, the company is responsible for paying its own tax. Regarding the companies profits they are either to be distributed to the shareholders in the form of dividends or retained by the company.

The bit he is entitled to I'm struggling on. I would have thought the value of the company was taken into account when the shares were purchased from him i.e. he has had his share of the company already. What I don't know is whether he would be entitled to any dividends from the year in which he held the shares.

[Jenni@FarrantFrost]

What I don't know is whether he would be entitled to any dividends from the year in which he held the shares.

If dividends were voted for when he was a shareholder he is entitled to any that have not yet been paid. Now he is not a shareholder he is not entitled to any dividends.

As Mattonella says above, if he's accepted a price for the shares then that's usually final. How did you value his 34 shares?

[Siren]

I don't know if I explained the situation well. My partner wants a third of everything, before the company pays its taxes. We were arguing that the company should pay the taxes first and then split things by a third, but after what we have learned we aren't so sure that he is entitled to a third of everything.

As for the shares, that's very interesting. He sold them to us for the amount we bought them for.

Anyway, thanks for the reply, you've given us a lot to think about.

[Siren]

Thanks, Jenni.

The shares were valued at £1 each, since that's how much we paid for them, that's how much he sold them back to us for.

There were never any agreements or anything.

[Jenni@FarrantFrost]

Technically, one would sell the shares at their true value. Simplistically, create a balance sheet as at the date of sale, and if there are 100 shares, then pay 34% of the BS total.
To create a BS as at the date of sale, one has to take into account all things pending including tax, so to ask for a third of the profits before tax is not reasonable. Also, the profit does not take into account company reserves, liabilities, fixed assets, bank balances etc. Therefore again, to ask for a third of pre-tax profits is not reasonable, to ask for a third of the value of the company at the date of sale, is.

As he has sold his share to you for the nominal value of £34, I would have thought he would now have to take legal advice and then action to recover the true value of the shares, though I suggest you get firm advice on this.

My gut feeling is that he has shut the stable door after the horse has bolted and should have asked for the shares' true value before selling.

Good luck :)

[Siren]

LOL

Very helpful information. He is not getting a pence more than he is legally entitled.

Thanks again. :D

[complete]

I totally agree with Jenni.

I have bought out 2 Directors in the past and paid them an agreed value per share. It was all done through solicitors and once shares had been redistributed and The directors paid thier amount that was the end of it. No claims could be made afterwards by either parties against the other.

I think as he accepted £1 per share (mug) that is all he is entitled to as he has resigned from the company.

Sometimes paying a few hundred quid in legal in advice beforehand is a worthwhile expenditure.

[mahutchinson]

I cannot discern that this guy is entitiled to anything from the facts given.

[Chris Ashdown]

It sound like legaly he has sold his interest in the company with the selling of his shares ( have they been entered into the company records properly and issued properly)

Morally he may have been ignorant of what he was doing and you could consider offering a realistic price for them

Treat others as you would like to be treated

[DuaneJackson]

Sounds like he would have been a right b*stard if he still had the shares and hence a hold over you. If he has no shares then he has no entitlement to any share of the profits (unless you've formally agreed anything)

What a shame : )

Make damn sure the shares have all been transferred before you tell him anything.

[Siren]

It sound like legaly he has sold his interest in the company with the selling of his shares ( have they been entered into the company records properly and issued properly)

Morally he may have been ignorant of what he was doing and you could consider offering a realistic price for them

Treat others as you would like to be treated

There's a lot more to this than what I've shared. It all happened so fast that I guess he didn't do his research. One day out of the blue, he just demanded we let out of the company or else, and that was that. But no worries, we will be fair.

[Chris Ashdown]

Sounds like he would have been a right b*stard if he still had the shares and hence a hold over you. If he has no shares then he has no entitlement to any share of the profits (unless you've formally agreed anything)

What a shame : )

Make damn sure the shares have all been transferred before you tell him anything.

Rather cut throat dont you think

Maybe it shows how you run your company

[DuaneJackson]

Maybe it shows how you run your company

In the best interests of existing shareholders you mean? Yes, I'm obligated to.