Return of unwanted shares to a company
Gannons oversaw the exit of a shareholder from a business, and helped with the return of unwanted shares to his former 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, hence the company gave shares to its employees as “sweat equity” in order to supplement regular salary.
Early into the project one of the shareholders announced that he could not commit to continuing. The employee felt it was therefore unfair that he continued as a shareholder, as he wanted to pursue other interests.
Employee shares were restricted, although the restrictions did not apply to non-shareholders. The employer wanted to know if it would be possible for him to return shares to the company for no value.
Finding the solution
We considered the corporate structure, reviewed the corporate documentation, and planned a way for to return our client’s unwanted shares. The solution had to satisfy the interests of various external investors.
We facilitated a path upon which there were no adverse consequences for either the employee returning the unwanted sweat equity, or for the remaining shareholders.
Issues relating to the return of unwanted shares
Shares can be returned to a company for no value (i.e. as a gift). It is important to plan for what the company intends to do with the return of unwanted shares.
In this case, both parties agreed to cancel the unwanted sweat equity shares that the employee held following the gift.
Reasons to review the articles
We considered the articles of association of the company. We saw that these articles allowed the company to reduce its share capital. A reduction means that the existing shareholders have their shareholding percentages increased proportionally.
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 checking. This is because the shareholders can veto the whole transaction under the company’s articles, if any steps are taken that they have not authorised.
Transactions at an undervalue
The employee agreed to return the shares at an undervalue. This was possible 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
The company intended to cancel the gifted shares. Therefore all parties involved needed to follow a strict procedure. The company, its directors, and its shareholders needed to take the following steps:
The steps were:
Stock transfer form
For a gift of shares to the company, the exiting shareholder had to complete a stock transfer form. This then returned his unwanted shares to the company.
Statement of solvency
The directors of the company provided both 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 directors sign a statement of compliance to show that the company has complied with the Companies Act 2006. Companies must adhere to the strict deadline between signing a solvency statement and the statement of compliance.
At least 75% of shareholders able to vote have to approve the transaction. Passing this special resolution reduces the share capital.
Filing at Companies House
The company must meet the filing requirements of Companies House.
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 fundraising.
We would definitely want to work with Gannons again after seeing their expert handling of this issue.