Selling Shares in Private Company

[miss moss]

Hello All,

This is my first post and I'm a newb!

Apologies if this is the wrong place to have posted this but I need some rather swift advice and I'm hoping that someone on these boards may be able to point me in the right direction.

I own 15% of a successful UK based business. I am an employee of this business (although I don't have an employee contract, just a shareholders agreement). For personal reasons, I want to sell my shares and leave, however I'm rather at a loss as to where to start.

Our shareholders agreement is fairly water tight as far as offering the others first refusal goes, however I'm not really sure what happens if they don't wish to purchase them. If I offer them externally, how do I go about advertising this and are there companies that can help me get them on the open market???

This is the first time I have had to do this so any advice from more experienced entrepreuneurs would be greatly appreciated.

Miss Moss

 

[traxor]

If you're in a private limited company, then only friends or family of the directors can be shareholders in that company, so as far as selling them goes, you're limited and can only sell them to people you know, you cannot advertise them for sale anywhere otherwise you're breaking the law.

To be honest, you're better of just approaching one of the other shareholders up front and offering them to him for your set price and say you're no longer interested in being a shareholder in the company, the worst they'll do is be annoyed for a few weeks, then realise that when the divident payments come up, they're going to be getting a hell of a lot more money than they did before.

 

[DuaneJackson]

If you're in a private limited company, then only friends or family of the directors can be shareholders in that company, so as far as selling them goes, you're limited and can only sell them to people you know,

That's new to me. Do you have any links to back it up?

you cannot advertise them for sale anywhere otherwise you're breaking the law.

That too!

 

[miss moss]

Hmmm.

Our shareholders agreement does say that I can offer them externally if the other shareholders reject the share transfer agreement... So I just assumed that I could sell them to anyone I pleased.

What I'm really getting at is that none of the individual shareholders can actually afford to buy me out so where does that leave us?

So what you're saying is that I can't phone up our competitors and offer them the shares?

And traxor, do post those links if you can.

Thank you for your responses.

MM

 

[traxor]

http://www.duport.co.uk/company-formation/information/shares.htm

what is a share?
A share is a token of ownership, and each one represents a vote in the company concerned. A typical start-up company will have a nominal share capital of 1,000 shares (although they may have many more), and any individual shareholder can have just one, or many.
what do they do?
As every share counts as a vote in the company, the more shares you have the more votes you have - for example, a person with 5 shares can out-vote a person with 4 shares.
The proportions of these votes depend on how many shares you have issued. For example, if you issue 100 shares and have two shareholders with 50 shares each this is exactly the same as issuing 10 shares and each shareholder having 5.
We do not advise you to issue many shares, as this allows a reserve for later should you wish to use it for additional share holders.
Shares may also carry the right to dividend and may allow the individual shareholder to benefit from the sale of the company.
what are they worth?
Each share has a "nominal value" (usually £1) but that has no bearing on the true value of the share or of the company. For instance, a company with a "nominal capital" of £1,000 represented by 1,000 shares may be sold for £200,000, in which case those 'nominal' £1 shares would have a 'real' value of £200 each.
what is a dividend?
Dividend is a payment made to the shareholders of a company in proportion to the number of shares held. Dividends are not paid automatically; it is the decision of the board of directors whether a dividend will be paid in a particular year, and how much dividend will be paid per share. This decision will normally be made on the basis of the company's profits.
who can own shares in a limited company?
Anyone can hold shares in a limited company, including people who also work in the company and receive a salary.
who can own shares in a private limited company?
A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses. Shares in a private limited company may only be sold or transferred with the permission of the directors.

 

[miss moss]

I own a Ltd Company... Sorry wrong terminology. I meant it's not a listed company.

Back to the original question how do I get my shares on the open market given the other shareholders can't / won't pay out?

Thank you.

MM

 

[traxor]

The only way you can get them on the 'open market' is by becoming a PLC, otherwise you have to get a written agreement from all of the directors to allow you to sell your shares to a third party, and even then it has to be an agreed person and you cannot advertise it to just anybody.

 

[David Griffiths]

Get some proper legal advice, based on the specific terms of your shareholders agreement. Such agreements normally have a provision to require continuing shareholders to buy out the interest of somebody who wants to leave - it works both ways. If you don't have a clause like this I suggest that the agreement isn't very well drawn up. But every agreement is different, so advice has to be specific to your circumstances.

Having said that there are some comments above that I have to disagree with, including the comment on Dupont's site

A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses. Shares in a private limited company may only be sold or transferred with the permission of the directors.

That's not, in my experience, normally the case. The Articles of a private company may well contain a right of existing members to have first refusal on the shares, and there's a common exception to that if an existing shareholder transfers to a member of his family. It does not mean that you can't transfer to somebody else at all.

I also disagree with the statement that you need to become a plc to get rid of the shares on the open market. The company only needs to become a PLC if the company wishes to offer shares to the general public. It doesn't have to become a PLC for an individual shareholder to do this.

Having said that, I think that you might find that it is quite difficult (read next to impossible) to sell a 15% shareholding in a private company in normal circumstances. That size holding gives no influence or rights, and the existing shareholders could cut off dividends quite easily. There would certainly be a substantial discount from the price per share that the whole company would fetch - perhaps 80% or more off the whole company price.

 

[Free Lance]

Listen to David Griffiths. He is correct. The stuff about only friends and family of a director of a private company can hold shares is just 100% wrong. Anyone who can enter into a contract can hold shares in a private limited company.

Just reinforcing what has been said already. There is very little demand for 15% of the shares in a ltd. The best bet are (1) the existing shareholders, (2) other senior employees the company might want to motivate (but do they have enough £) or (3) the company itself. The last option (3) requires there to be distributable profits in the company to use for the 'share buyback'. (It can be done if there are insufficient profits but that is, frankly, too complicated and expensive)

There is no ready market available to you. If you try to sell to a competitor then, even if you have offered them internally (pre-emption process) and they are not taken up, it is likely that there will be a right for the directors to refuse to register the transfer - transferring to a competitor is just what those clauses have in mind.

Take advice. The default position is that the shares are your to keep forever. However, that position can be changed by agreement. Your shareholders agreerment (or the company's articles) might have 'good leaver/bad leaver' provisions or compulsory transfer provisions - which are triggered if you cease to be an employee.

If not then there will be some pressure within the company to buy you out eventually - use that. Shareholders want to receive dividends because it is tax efficient. If you get 15% every year then that is one good reason to buy you out now.

 

[DuaneJackson]

I'm glad I wasn't wrong - it does happen sometimes.

It's a shame you don't have a mexican shootout clause, or you would have got a fair price for the shares or ended up owning the company!

 

[miss moss]

Thank you for all the responses so far, they are very insightful.

I've had our shareholders agreement reviewed by a solicitor and of course I have to offer the other shareholders first refusal. After this point, if they are not interested I can offer them to whomever I like and there doesn't seem to be any clause which says we need the other shareholders approval to seal the deal.

There is no clause that says if I cease to become an employee then my shares have to be sold. So I guess there is always the option to just resign and keep my 15%.

Our company operates slightly differently in that our dividends are split three ways rather than me getting the 15% that any other shareholder would normally get. This was something that I insisted on from the outset.

The only reason I am a minority shareholder is because I didn't have the same amount of money to put in at the start.

We wrote our shareholders agreement with the bias towards the minority shareholder (me) so that the other two couldn't out vote me based on the weight of their shareholding.

So, my question is does an outside "buy" these rights too or are they just buying the A Class Shares?

Sorry, probably fairly basic questions but we've set the company up in such an odd way...

I suppose, Free Lance, you have predicted what my worst fears would be - which is having the shareholders refuse to buy them but not being able to sell them exterally and me sitting in limbo when I really want to get out.

The comment about me not necessarily taking 15% of the entire value of the company puts a totally different spin on this entire decision to be honest. I just assumed that if I owned 15% of the company, I would get 15% of what the company is worth if I sold...

Any more thoughts, welcome.

MM

p.s. sorry for the tardy responses, you may have noticed I'm on a different timezone.

 

[DuaneJackson]

I'd have thought that the rights are attached to the shares, so the rights would go with the shares. Your solicitors or someoe here should be able to confirm.


Re the value of them - it'd depend purely on what someone is willing to pay for them. It could be £1 or £10m. There wont be a set price due to the supposed value of the company.

They're likely to be of limited value to anyone except existing shareholders.

Also, bear in mind that if you get more for them than you paid then it'll be subject to Capital Gains Tax (the % varies dependent on if you've held them for over a year or not and on whether or not you've used your CGT "Entrepreneurs Relief" already)

 

[DuaneJackson]

recent posts moved to new thread: http://www.ukbusinessforums.co.uk/forums/showthread.php?t=160577

 

[Jim-penny]

you said it would be from £1 or £10m . i want to know how it can be