Return of shares to the company

Solving the problem of a shareholder who did not want shares

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Return of shares to the company

Our client had incorporated a company for the purpose of developing an action sports social platform. The company was incorporated so that its shareholders were the developers of a social media platform.  Cash was tight so the shares were seen as “sweat equity” given to supplement regular salary.

The problem

Early on into the project one of the shareholders announced that he did not have the commitment to continue.  The employee felt it unfair that he continues as a shareholder.  There were restrictions placed on the employee shares which did not apply to non-shareholders. In the background, it was obvious the employee wanted to pursue other interests.

  • The employer wanted to know would it be possible to have the shares returned to the company for no value?

The solution

We considered the corporate structure, reviewed the corporate documentation and planned a way for the unwanted shares to be returned.   The solution had to satisfy the interests of various external investors.

We facilitated a path which meant there were no adverse consequences for either the employee returning the unwanted sweat equity nor for the remaining shareholders.

Issues relating to the return of shares

Shares can be returned to a company for no value (i.e. gift). It is important to plan for what the company intends to do with the return of unwanted shares.

In this case, it was agreed that the unwanted sweat equity shares held by the employee would be cancelled following the gift.

Reasons to review the articles

We considered the articles of association of the company. We saw that the company was be permitted to reduce its share capital. A reduction means that the existing shareholders have their shareholding percentages increased pro rata.

Risk of a void transaction

In some cases it is necessary to amend the articles to permit a return of shares.  It is always worth a check.  This is because if steps are taken which are not authorised by shareholders or under its articles the whole transaction can be void.

Transactions at an undervalue

The employee had agreed to transfer the shares at an undervalue.  The undervalue arose because he was not paid consideration.  This can  give rise to tax implications.  We reviewed the position carefully so that there was an awareness of the tax consequences.

The procedure for completing the return of unwanted shares

Because the company’s intent was to cancel the gifted shares a strict procedure needed to be followed by all.  This meant that there were procedural obligations imposed on the company, its directors and shareholders.

In outline the steps were:

Stock transfer form

For a gift of shares to the company, the exiting shareholder completed a stock transfer form transferring the shares to the company.

Statement of solvency

The directors of the company provided a statement of solvency and a statement of compliance. A statement of solvency shows that the company is able to create a reserve for the purposes of reducing the company’s share capital. The statement of compliance is signed by the directors and shows that the company has complied with the Companies Act 2006 in providing a statement of compliance.

There is a strict deadline requirement for the time taken between signing a solvency statement and statement of compliance to adhere to.

Special resolution

The transaction has to be approved by at least 75% of shareholders able to vote. When this special resolution is passed the share capital is reduced.

Filing at Companies House

The company must has to meet the Companies House filing requirements.

Helen Curtis regularly advises businesses on the equity structuring matters. Helen has the skills to recommend the best ideas for companies at all stages of development from start up through to those nearing exit and businesses at the stages in between such as fund raising.