Recent cases where shareholders received a capital distribution

  • Posted

Normally if the company distributes cash or assets to a shareholder the shareholder is treated as having received a dividend. The rate of tax payable on dividends is much higher than if the equivalent was treated as a capital receipt in the hands of shareholders and assessed to capital gains tax. In some cases the capital gains tax rate can be as low as 10% if entrepreneurs’ relief is successfully claimed.

To help you see if we can assist you we have set out some recent examples of our work.

We help companies deal with capital distribution transactions to shareholders. We also work independently with shareholders to guide them down the most effective path.

Company buy back of shares from a disgruntled shareholder

We were acting for a company purchasing shares from a disgruntled shareholder. The business is an on-line technology platform selling digital media services. The disgruntled shareholder did not want the business to expand at the rate it was and did not want to obtain equity funding to support the growth. As a result, it was agreed that the company would buy back his shares to avoid a costly shareholder dispute.

Successfully protecting trade secrets

By drafting and negotiating the documents for the company, we were able to ensure that sufficient protection to trade secrets was provided for the company so that the disgruntled shareholder was not able to form a new business within a certain geographical location to our client.

Company buy back of growth shares as a gesture of goodwill

We assisted a technology company on its buy back of growth shares. The facts of this case were that the company had issued growth shares to certain employees of the company. Growth shares are a special class of share. They are designed to allow the holders to benefit only from growth on the value of the company from the time the shares are issued. The growth shares provided that should the shareholders receive an offer to buy the company, which was in excess of £20m, the growth shareholders would be entitled to receive 5% of the sale proceeds.

The shareholders did receive an offer to buy the company which they accepted. However, the offer was less than the £20m required for the growth shareholders to benefit from the sale proceeds. The growth shareholders were considered integral to the success of the business and as a gesture of goodwill, the company agreed to purchase back the growth shares from the growth share holders just before the sale.

Return on investment

This meant that the growth shareholders were not benefitting from the sale proceeds. However, they at least received some return on their investment in terms of time committed. We were able to act quickly. We ensured that the share buy back agreements and supporting documents were signed before the sale of the company.

Cancellation of shares upon the departure of a director

In this case we structured a shareholder-directors’ exit from a technology company. The parties agreed that the director should leave and that under the articles the director was compulsorily required to transfer his shares to the company following which the shares would be cancelled. There was a business dispute as to whether the director was regarded as a good or bad leaver . Acting for the director we established via negotiation that the director should be regarded as a good leaver. The articles referred to the director as a good leaver being entitled to “fair value”.

Fair value for the shares

There was a dispute over how fair value should be calculated. As the parties could not reach agreement we agreed that an independent valuation should be commissioned as a way to resolve the shareholder dispute. Whilst the dispute was being negotiated we agreed that our client the director would not resign. If he did, that would rule out the possibility of entrepreneurs’ relief. Once the fair value had been established the company proceeded to implement the share buy back. Our client was paid the fair value due for his shares.

We oversaw the procedures required under the Companies Act to implement the share buy back and checked the correct filings had been made at Companies House.