What happens if Shareholders disagree?
With our government in a state of flux, the unprecedented rapid rise of living costs and persistent financial and health related fatigue from the effects of Covid it is not surprising that more and more businesses are coming across issues and dilemmas on which the owners have different views on how to proceed.
Sometimes the existing voting arrangements just lead to a deadlock situation, and it seems that no practical resolution is possible with the existing structure. The owners may need to think whether changing the ownership structure by agreeing an exit for one of the parties is the only way forward. This is generally the resolution put forward by the courts if litigation results from the deadlock and so it makes sense to try and pre-empt that by the parties agreeing an exit through one of the following options.
Firstly, the company could buy shares of the shareholder who is ready to move on. The Companies Act 2006 permits share buybacks, but only if the company has sufficient distributable profits and full payment is made on completion. This means that any kind of payment plan (deferred consideration), to help cashflow, is out of the question. A buyback in tranches (several buybacks) however does not fall foul of the legislation.
Secondly, the leaving shareholder has the option of selling their shares in the original company to another company, newly established by the remaining shareholder, in exchange for deferred consideration. This new company will then become the holding company after completion of the purchase.
Both options come with tax issues to consider, please seek advice from your accountant.