Why is resolving disputes between founders such a challenge?

Business break-ups can be particularly difficult, especially where the business was co-founded by a partnership or small team. Disputes between co-founders can be some of the most challenging to resolve, particularly where personal relationships and the future of the business are both at stake.

Common causes of disputes between business founders

Rifts can develop as a company grows. Founders may develop different ambitions for the business or have different expectations about how much time they can or want to commit. Even strong personal relationships can come under pressure when running a company. In more difficult circumstances, personal issues can also affect the business and relationships between founders.

Whatever the underlying issue, the most reliable way of resolving a dispute between company founders is often to put emotion to one side and seek a commercial settlement. Usually, this means one party buying out the other.

This presents another challenge – how will the purchase be funded? The remaining shareholders may be willing to fund the purchase themselves, but this can require significant resources to satisfy a departing shareholder.

Can the Company afford to buy the shares?

Assuming the company has sufficient distributable reserves, it may be possible for the company to buy back its own shares. This has the obvious advantage that the remaining shareholders do not need to fund the purchase personally. Furthermore, shares bought back by the company will usually be cancelled after the transaction, or may be held as treasury shares, which can help preserve the existing balance of power among the remaining shareholders.

How to structure the deal so that the payment is taxed as capital on a Company buyback

If someone other than the company purchases shares, the sale proceeds will generally be taxed as a capital gain. However, when a company purchases its own shares, the payment can ordinarily be treated as a distribution unless the statutory conditions for capital treatment are satisfied.

Where those conditions are not met, the payment may be subject to income tax as a distribution. Where the conditions are satisfied, the payment is instead treated as consideration for the disposal of the shares and subject to Capital Gains Tax. The tax difference can be significant and may affect whether a proposed buyback is commercially viable.

To obtain capital treatment, various statutory conditions must be satisfied. These include requirements relating to the company, the seller and the purpose of the purchase. One of the relevant requirements is that the purchase must be for the benefit of the company’s trade. HMRC guidance recognises a shareholder dispute and the purchase of the shares of a disgruntled shareholder as an example where this requirement may be met, although each case depends on its facts.

In order to qualify for capital treatment under the relevant conditions, the seller must generally have owned the shares throughout the five years ending with the purchase.

It is possible, and often advisable, to ask HMRC for advance clearance to establish whether the relevant conditions for capital treatment are satisfied.

Can the Company buy the shares in instalments?

The short answer is yes, but there are important company law and tax requirements to consider. Company law requires payment for a purchase of own shares to be made in full on completion. One approach is therefore to buy back the shares in tranches, although this will mean continued, albeit diminishing, ownership by the outgoing founder.

It is possible to transfer the entire beneficial interest in the shares on day one, with the legal interest transferring in respect of each tranche as payment is received, but the structure needs to be carefully documented.

Creative deal structures that can help get a settlement over line

There may be circumstances where a deal needs additional flexibility. Perhaps there is insufficient money in the company to fund a buyback, the departing shareholder cannot benefit from BADR, or has not held the shares for long enough to satisfy the relevant conditions. Alternatively, the deal may only be viable if payment is made in instalments.

For these or other reasons, the transaction may need to be structured carefully to achieve an outcome that works for all parties.

One solution can be to use a new holding company (the TopCo). In this scenario, the new TopCo purchases all the shares in the original company. In exchange for their shares, the departing shareholder receives cash or other consideration, such as loan notes issued by TopCo, while the remaining founders exchange their shares in the original company for shares in TopCo. As the departing shareholder is selling their shares to a third party, this can provide greater flexibility in structuring the transaction for tax purposes. However, there are technical requirements to consider and the structure will need to be assessed carefully in each case.

Business Asset Disposal Relief

We have seen that there can be a significant advantage where a share purchase qualifies for capital treatment. This advantage may be greater if Business Asset Disposal Relief (BADR) applies.

For qualifying disposals made on or after 6 April 2026, BADR applies a Capital Gains Tax rate of 18%, subject to the £1 million lifetime limit for qualifying gains.

For a shareholder disposing of shares in their personal company, the qualifying conditions include holding at least 5% of the ordinary share capital and voting rights, together with the relevant economic interest, and being an employee or officer of the company. The conditions generally need to be satisfied throughout a two-year qualifying period ending with the disposal.