Getting rid of ltd co shareholder - at no cost??

[darreni]

Looking for a bit of advice:

5 of us set up a ltd company 3 yrs ago, all 20% shareholders, all employed directors.

2yrs ago one of the directors resigns (as could'nt get own way, normal stuff) but still remains a 20% shareholder.
In the last 2 years the ex director has directly cost us £30k in churned business (financial services).

As we run the company with no profit (accountants advice), him still being a 20% shareholder was no problem - no profit/no dividend.

however, now the guy wants to know if we wish to buy his shares, stating he has other interested party.


If we have no profit, are the 20% shares actually worth anything to anyone?, or is there a clause deep down in the mem & arts somewhere that will allow us to remove him /make him forfeit the shares.

I really don't want to be paying him anything after covering his 30K loss. Can he cause problems if we allow him to continue holding the shares?

Any assistance greatly appreaciated.

Darren

[pdV6]

[not very helpful mode]
No idea at all, but what's the worst that can happen?
Some other person gets a 20% share of £0.00 profit?
[/not very helpful mode]

[ninja_eli]

You need to look at your co docs (memorandum and articles). If they are straight copied from table A, it is highly likely that there will be pre emption rights. If these rights have been removed (either not specced or special/written resolution etc) then you can issue shares and purchase them yourself. Depends also how your authorised share capital is organised, most prob £1 shares but could be 50p or more, you need to check.

Get in touch with a lawyer, needs proper look into, sorry havent got time to write a full reply (well busy today, for a change... Dom, that dont mean you can slack lol) but email me if you want more details of where to look for your info but in the end its prob best to seek legal advice.

From what it seems from your set up, you and friendly shareholders will always be in control as you have more votes and always enough for a quorum.

good luck

[Antwerpman]

sorry if I am way off the mark, but as a shareholder does he not ulmtimately have a claim against retained earnings and any capital which is employed on the business??

[bobthebench]

Not my usual area, but ....
Don't see obvious way to force him out. Can force sale if company takeover - basically set up new company to take over old one, if you acquire a set threshold, can then compel remaining shareholders to sell. Guess shares must be worth something though, even if not making a profit. Amazon doesn't (or didn't) make profit, yet share price went thru the roof.

[Eric Mc]

Retained profits would not be the only issue. In this case, retained profits may be very low, as the directors (apparently) have drawn most of the company's profit as salary. Hoowever, there may be an element of "goodwill" in the business, some of which may be attributable to this shareholder. If that is the case, he may feel entitled to some consideration for his shares. It all depends on the history of the company, capital injected (whether through shares or loans )by the participants, the nature and value of the business generated and how it might be attributed to the participants. If the shareholder did have an input into the business, whether through time or money, he really would be entitled to soemthing. Quantifying the amount is the difficult part.

[Don]

We were in a very similar position. Luckily our ex-director was very decent about it and we were able to come to an agreement.

Have you considered negotiating? Not to put too fine a point on it - you could simply bribe him to sign the papers with a few grand. I suspect he would not have contacted you about this if he wasn't looking for ways to raise a few bob.

To be honest if you can't come to a deal you'll likely be looking at a "fair valuation" of the shares (read audit fees!) and then buying them.

Luckily you CAN do this with Company money so your remaining directors don't have to stump up the money out of tax-paid earnings.

Check with a lawyer/your auditor, certainly, and get advice...but don't forget you may be able to negotiate amicably.

Final point - if the value of your business is all in the people who work for it...you just start a new one with a very similar name and wind the old one up. Even if the inconvenience of this is too awful to contemplate its a very good negotiating lever...

[Size Nine Elm]

As mentioned before, check the Articles of Association for the company.

Frequently there are 'bad leaver' terms regarding shareholdings, and if the departed director is causing business churn to the company, this is likely.

Although if you're not aware of such provisions, they are unlikely to be in the articles.

Been in a similar position, and a 'pheonix' company is a solution - a new company with the shareholders and setup you want, and then put the existing company into voluntary liquidation, with the new company buying out all the assets/goodwill etc. Can be handled smoothly - for a price - and you need to make customers aware that there is a minor change in the structure of how you are doing business.

But it may well be easier to just bung the ex-director a few quid. (Or a man in a pub... however this does not constitute a death threat...

[darreni]

Thanks for the advice guys, the ex director did inject capitial at the outset of the business (as did we all) but this was repaid (& documented) to him a couple of years ago.

I do agree with the pheonix idea, but it would be a shame to loose the company name etc.

We have considered "negotation" .

What about issuing a huge amount of extra shares & us remaining directors buying them, would this then dilute his 20% (this seems to work well for marconi & Baltimore tech, among others, bastards.)

Darren.

[Size Nine Elm]

darreni said:

I do agree with the pheonix idea, but it would be a shame to loose the company name etc.

You can rename the existing company to 'OldCo ABC' and then start a new company with the old name. Or alternatively just use a very similar name - 'Company ABC' becomes 'Comapny ABC Trading', only you drop the Trading from all logos/printed material.

darreni said:

What about issuing a huge amount of extra shares & us remaining directors buying them, would this then dilute his 20%

Almost certainly he will have preemption rights and will be entitled to buy a part of any new share issue in proportion to his existing shareholding.

Not that I'd be devious, but if you were to lower the balance sheet value of the company by letting assets depreciate, paying salaries/bonuses, and taking a small overdraft, you might be able to present a minimal 'fair value' on the shares in any buyout, and the only negotiating point is then past goodwill, since any future value is obviously not going to be contributed to by the ex-director.