Unusual share transfer in private company query

[millen]

Excuse this odd question! I’m the only non-insider investor in a small unquoted company, with c. 5% of share capital. The founder/CEO has sought approval to transfer the major part of his shareholding to his wife, who currently holds no shares. This will mean that Person with Significant Control status (25%-50% of voting rights) transfers from the founder to his wife, who I believe has no material involvement in the business. The founder tells me that the transfer is to facilitate their applying for a new residential mortgage. A reputable asset manager holds c. 20% and has consented to the transfer.

In principle I’ve no reason to object and if it helps the founder + wife to move to a new home that’s a great outcome. It’s many years since I last applied for a mortgage and I’m sure eligibility terms have become more complex. But I struggle to see how this share transfer within a married couple should affect their mortgage eligibility. If the company was paying a dividend, then perhaps this would help to boost one party’s reported income at the expense of the other, but it’s not dividend-paying currently and there’s little prospect of one in the next couple of years. I don’t see how a change in the split of ownership of an illiquid asset should otherwise make any difference.

So my questions are:
1. Is this type of share transfer common within private companies?
2. Does the ‘mortgage explanation’ stack up; if not, should I be slightly wary?

[mx stu]

millen said:

Excuse this odd question! I’m the only non-insider investor in a small unquoted company, with c. 5% of share capital. The founder/CEO has sought approval to transfer the major part of his shareholding to his wife, who currently holds no shares. This will mean that Person with Significant Control status (25%-50% of voting rights) transfers from the founder to his wife, who I believe has no material involvement in the business. The founder tells me that the transfer is to facilitate their applying for a new residential mortgage. A reputable asset manager holds c. 20% and has consented to the transfer.

In principle I’ve no reason to object and if it helps the founder + wife to move to a new home that’s a great outcome. It’s many years since I last applied for a mortgage and I’m sure eligibility terms have become more complex. But I struggle to see how this share transfer within a married couple should affect their mortgage eligibility. If the company was paying a dividend, then perhaps this would help to boost one party’s reported income at the expense of the other, but it’s not dividend-paying currently and there’s little prospect of one in the next couple of years. I don’t see how a change in the split of ownership of an illiquid asset should otherwise make any difference.

So my questions are:
1. Is this type of share transfer common within private companies?
2. Does the ‘mortgage explanation’ stack up; if not, should I be slightly wary?

I can't give a defintive answer, however when applying for a mortgage last year lenders wanted to see two years sets of completed annual accounts from the date I became a director/ > 25% shareholder. This was on the basis I owned a c.30% interest in a private company. The business has been operating for over 40 years, profitable every year and I'm paid a market rate salary through PAYE (which was the basis for the mortgage). I ended up transferring half my holding to my wife, it wasn't queried further and the mortgage went through fine.

The Articles of Association for most companys permit the transfer of shares between spouses without the need for other shareholders to consent.

[sociopath]

In my not vast experience, if it's a private limited company it appears the majority shareholders can do what they like and fk the minor holders