Buying out a shareholder

If one of the shareholders in your company wants to retire or leave, and you want to buy their shares, there are two ways of doing it. Either you buy the shares personally, or the company buys them back from the outgoing shareholder and cancels them, which leaves the remaining shareholders owning the whole company between them. The commercial result is much the same, but the legal rules, the paperwork and the tax are quite different.

I act on shareholder buyouts in owner-managed companies, usually for the shareholders who are staying and the company, and sometimes for the one who is leaving. If you’re the one leaving and the company is buying your shares, my article on company share buybacks sets out the protections you should look for.

Buying the shares personally

The simpler route is for you (or you and the other remaining shareholders) to buy the shares under a share purchase agreement. Where you’ve both been running the business for years, you already know it as well as the person leaving, so there’s usually no need for due diligence, a long list of warranties or a disclosure letter, and the agreement can be much shorter than on a sale to an outsider.

The difficulty is usually the money. If the value is mostly cash sitting in the company, you’ll need to get it out of the company before you can pay it to the seller, which usually means a dividend or a loan from the company, and each of those has tax consequences for you. Stamp duty is also payable by the buyer on a share transfer, at 0.5% of the price where it’s over £1,000 (HMRC’s guidance explains how). Paying the price over time is possible on a personal purchase, and the seller will then want some security for what’s still owed, which I’ve covered in my articles on deferred payments.

The company buying back the shares

A company can buy its own shares, but only if it follows the rules in Part 18 of the Companies Act 2006. If they aren’t followed, the buyback can be void, which can cause real problems years later when the company is sold and the buyer’s solicitor looks at the share history.

In outline, the company’s articles mustn’t prohibit it, the shares have to be fully paid, and the company normally needs enough distributable profits to fund the purchase, as having cash in the bank isn’t enough on its own. There has to be a written buyback contract approved by a shareholder resolution before the shares are bought, and the shares must be paid for on purchase, which means the company can’t simply agree to pay the outgoing shareholder in instalments over the next few years. If it can’t afford to buy everything at once, the shares can be bought back in stages, with each batch paid for when it’s bought. Once the shares have been bought they’re cancelled, and the filings at Companies House are due within 28 days.

A buyback avoids the remaining shareholders having to find the money personally, but the tax treatment for the seller can go one of two ways (income or capital), depending on conditions which HMRC applies strictly. Which route is better for everyone is mainly a tax question, so it’s one for your accountant before anything is agreed. On cost alone, a straightforward personal purchase is usually quicker and cheaper.

What the articles and any shareholders’ agreement say

Before agreeing a price it’s worth reading the company’s articles and any shareholders’ agreement, as they may already decide how this works. They might give the other shareholders a right of first refusal when anyone sells, set out how the shares are to be valued, or treat a departing shareholder as a good or bad leaver with a different price for each. They may also restrict who the shares can be transferred to, or need the directors to approve the transfer.

If there’s nothing in place, everything is a matter of agreement between you, which is fine where you get on and agree the price, and harder where you don’t.

The outgoing shareholder’s other roles

Most outgoing shareholders are also directors, and often employees, so the buyout normally has to deal with more than the shares. That means a resignation as a director, updating the register of people with significant control, and usually a settlement agreement to end the employment and waive any claims. Any director’s loan account needs settling one way or the other, and if the outgoing shareholder has given personal guarantees to the bank, a landlord or a supplier, they’ll want to be released from them, which needs the other party’s agreement. Restrictive covenants are worth considering as well if the person leaving could compete with the business or take its customers.

I prepare the board minutes and the resolutions that go with all of this. The Companies House filings after completion are done by your accountant.

When it isn’t agreed

All of the above assumes the shareholder wants to go and the price is agreed, or nearly. If you’re in disagreement about the price, or about whether they should be leaving at all, I can give initial advice and handle a negotiated exit. If it becomes a dispute, my Nexa colleagues who deal with shareholder disputes day to day are the right people to take it on.

How long it takes and what it costs

A buyout between shareholders who have agreed terms can usually be done in a few weeks, and it takes longer where a buyback needs the company’s accounts to be checked for distributable profits, or where the company’s records need tidying up first (missing share transfers and filings that were never made are both common).

I work on fixed fees, with a written scope of work agreed before I start. Every quote is specific to the deal, but as a guide my fee will be between 0.5% and 5% of the deal value. Under £1m it’s usually 3% to 5% and over £1m it’s usually 1% to 2%, although it does depend on the business, the price and the commercial terms. The minimum fee is £3,500 plus VAT, and on lower value deals I can quote for a reduced, more standard service.

Next steps

If you’d like me to act, send me the details, including the company’s name or number, who owns what, the price and how it’s to be paid, whether the outgoing shareholder is also a director or employee, and whether there’s a shareholders’ agreement. I’ll come back to you with a fixed fee and a scope of work.