Disputes between shareholders about the ownership and control of a company often involve a wide range of issues in addition to the question as to who will run the company. The majority of smaller disputes (particularly those between 50/50 shareholders) will result in one shareholder buying the shares of the other.
These disputes have other aspects. For example, each individual will usually be an officer of the company (the Company Secretary or a Director) as well as an employee but may also have loaned money or may be the landlord of the company’s premises.
It can be tempting to think that once the relationship between the parties has broken down, it is useful to take a piecemeal approach to the resolution of the dispute in order to “narrow the issues”.
However, there are several reasons why this would not be a sensible approach to take:-
- A common outcome of a dispute between shareholders (particularly if they each own 50% of the shares) is that one party will agree to buy out the interests of the other. If the purchaser is finding it difficult to raise sufficient funds to be able to do that immediately, there is a temptation for the shareholder selling his shares to sell some shares now (according to what the purchaser can afford to pay) and sell the rest of the shares later. However as soon as the ownership in those shares has been transferred, the balance of power in the control of the company changes and in respect of the remainder of the shares, the seller becomes a minority shareholder with an ongoing investment in a company that he no longer controls. What guarantee does he have that the buyer will purchase the remaining shares? On the other hand, if all the shares are transferred immediately but only some of the price, what guarantee does the Seller have the he will be paid the balance? What is likely to happen if the business fails?
- If the relationship between the parties has broken down, then even if issues over the ownership of shares still remain to be resolved, the parties will have to decide whether they both continue to work in the business. It can be tempting to think that it is beneficial for the proposed seller to resign from his employment before other issues are resolved. However if he does so, the parties lose the opportunity for structuring the compensation that is payable to the one who leaves. If part of what the departing shareholder receives is paid as compensation for the loss of employment, the money can be paid by the Company and the first £30,000 of that compensation can be paid tax free.
- If the shares are being sold so as to give rise to a capital gain, the seller will incur capital gains tax (subject to annual reliefs) on any gains made, at the full rate, unless he can show that he is eligible for entrepreneur’s relief. In order to do so, he must fulfil the qualifying requirements, one of which is that at the time that he sells his interest in the company he is also an officer or employee of the company.
- It is easy for the parties to focus so intently on what they perceive the major issue to be (e.g. how much will I have to pay for the shares) that they fail to tie up the loose ends. Has the Seller actually resigned as a Director? Has he agreed not to compete? Has he agreed not to poach staff or customers? Has he handed back all confidential information?
The moral of the story is that if there is a commercial dispute between shareholders, the detail is as important as the principle. It is usually beneficial to ensure that before resolving any aspect of the commercial dispute, proper legal advice is taken as to the potential implications of any interim or final steps that are being proposed and as to the best way to implement the agreement.