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Our client was a founder, minority shareholder, director and employee of a publishing company. After 10 years, she gradually reduced her working hours in preparation for retirement. A large multinational sought to acquire the business. We advised her on the sale of her shareholding and the tax implications.

Background to the sale of shares

We had initially advised our client in connection with a shareholders’ agreement and new articles of association when a third party investor joined the company. We ensured that those documents:

  • Prevented our client’s shareholding from dropping below 5%;
  • Confirmed that our client’s shares were full voting shares; and
  • Permitted our client to remain a director of the company.

We also advised on the company restructuring which involved amendments to the share capital to cater for different classes of shares.

Ensuring entitlement to entrepreneurs’ relief

It was important to enshrine into the corporate documentation that in the event of a sale, the minorities received the same consideration as the majority shareholders.

Our client was aware that the articles of association included drag along rights that could force her to sell her shares at the same price as the other shareholders. However, she was also keen to ensure that her rights were protected as fully as possible in the sale documentation (including the share purchase agreement). In addition, our client wanted to ensure that the transaction was structured in the most tax efficient way possible from her perspective.

Complications in the structure of consideration payable for the shares – earn out

The consideration for the sale of the shares included an initial consideration payable in cash at completion, and further consideration payable on the first anniversary of completion provided that certain conditions were satisfied (known as an “earn out”).

We advised our client that she would qualify for entrepreneurs’ relief in respect of the initial consideration on the basis that the following conditions were met throughout the one year period ending on the date of the sale:

  • The target company is a trading company (or holding company of a trading group);
  • She holds at least 5% of the ordinary share capital of the target company entitling her to 5% of the voting rights; and
  • She is an officer or employee of the target company (or one of the companies in the group).

Tax on earn out payments

The position regarding the earn out consideration qualifying for entrepreneurs’ relief was more complicated, particularly given the one year holding requirement. We therefore negotiated with the buyer than the consideration should be structured in such a way as to enable our client to benefit from entrepreneurs’ relief in respect of the earn out consideration as well as the initial consideration.

Warranties and indemnities – trade sale

The share purchase agreement contained a number of warranties and indemnities. However, as our client was only a minority shareholder in the company we negotiated with the buyer that she would not be required to give the warranties and indemnities on a joint and several basis with the other sellers. Thus, her liability would be limited to the maximum amount of consideration she was receiving under the share purchase agreement.

We reviewed the warranties and disclosure letter with our client to ensure that she was comfortable with the warranties that were being given and the disclosures that had been made.

Restrictive covenants

We also advised our client on restrictive covenants which the buyer required in the share purchase agreement. Our client was due to be retiring and had no intention of setting up a competing business. Therefore, we decided that negotiation of the restrictions, whilst they were prohibitive, was not problematic in this case and therefore time should not be spent negotiating the length and width of the restrictions. We explained that in different situations the restrictions can be important.

John Deane is a partner in the commercial team at Gannons. John acts for both buyers and sellers of businesses, and appreciates the considerations from both sides of the table. Please do not hesitate to get in touch with John if we can be of assistance. 

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