Share purchase by parent company

[Grove]

Can company A borrow funds from company B and then use the funds to purchase the shares of company B (the lending company)?

 

[dotcomdude]

I'd say that all of the current shareholders of company B should authorise both transactions, as they are the ones that could be disadvantaged by the transaction.

Other than that, I can't see why both transactions couldn't go ahead, although I'm only an enthusiastic limited company owner!

 

[SteveHa]

There's a lot missing. Who owns the shares at the moment? Are the companies connected? Will the loan be made at arm's length?

 

[Grove]

I'd say that all of the current shareholders of company B should authorise both transactions, as they are the ones that could be disadvantaged by the transaction.

Other than that, I can't see why both transactions couldn't go ahead, although I'm only an enthusiastic limited company owner!

Thanks for the response. I cannot initially see an issue with it.

There's a lot missing. Who owns the shares at the moment? Are the companies connected? Will the loan be made at arm's length?

Hi
I am looking to purchase company B for £280K. it is positive cashflow company with customers paying upfront for products and minimal overhead. As such has a consistent healthy cash balance of £500k. What i plan is to lend company A £280K which it will use to purchase company B. Company A then borrows £280K from company B and repays my loan. Company A will then own company B shares but also have a liability to it for £280k. Company A will invoice the profits of company B as management charges and use this to repay its loan.
Does this make sense?
Am I trying to be to clever?

 

[dotcomdude]

Anyone owning company B and having a £500k cash balance in it isn't going to sell it to you for £280k, unless they have emptied the account first.

Saying that, Phillip Green might sell it to you for £1 in certain circumstances!

 

[Grove]

Anyone owning company B and having a £500k cash balance in it isn't going to sell it to you for £280k, unless they have emptied the account first.

Saying that, Phillip Green might sell it to you for £1 in certain circumstances!

Hi
This is the position as i currently work for the company. It sells heating oil to domestic users and has a very large customer base. The 500k is funds paid upfront by customers on a monthly basis to fund future oil deliveries, like a savings/ budget plan. It dips to around £400k in the winter as oil usage goes up and increases to around £550k in the summer.

 

[dotcomdude]

The 500k is funds paid upfront by customers on a monthly basis to fund future oil deliveries

If I was a Director of the company I'd regard that as client money until the service was delivered. Maybe if it's an unregulated industry there's no legal reason to keep it in a separate client account, but there must surely still be an obligation on the Director's not to use it until it's earned?

 

[UK Contractor Accountant]

You need to consider the transaction in securities (TIS) legislation as you are effectively extracting profits from company A, which are normally subject to Income Tax as a distribution, and converting them into a capital distribution subject to Capital Gains Tax.

Traditionally a private company was not able to provide financial assistance to purchase its own shares but this was relaxed by the Companies Act 2006.

 

[SteveHa]

To follow on from UKCA's reply, there may be an alternative, depending on the distributable reserves of company B following the sale.

There are a lot of things to consider, and far more complicated than could be handled via a forum. You need to speak to an accountant.