purchase of shareholding and redistribution of shares

[Ascayman]

Hypothetically speaking...

4 Business partners own 25% each of a company. for arguments sake lets say that there are 10,000 shares with each director having 2,500. 1 Partner wants out and the company is buying back the shares, in order to afford to do so the other three directors / shareholders are having to sacrifice their dividends.

My understanding is that you don't actually buy back the shares, The director that wants out gets his money and as a result his shares are extinguished.

So the total share capital of the company falls from 10,000 to 7,500.

What does that mean for the remaining shareholders? does that mean they automatically become 33.33% share holders as a result? if so do they have any personal liability to pay?

[TooMany2cvs]

Ascayman said:

Hypothetically speaking...

4 Business partners own 25% each of a company. for arguments sake lets say that there are 10,000 shares with each director having 2,500. 1 Partner wants out and the company is buying back the shares, in order to afford to do so the other three directors / shareholders are having to sacrifice their dividends.

My understanding is that you don't actually buy back the shares, The director that wants out gets his money and as a result his shares are extinguished.

The company buys the shares back, then cancels them. The price the company pays him is whatever everybody agrees is a fair price.

Ascayman said:

So the total share capital of the company falls from 10,000 to 7,500.

What does that mean for the remaining shareholders? does that mean they automatically become 33.33% share holders as a result? if so do they have any personal liability to pay?

If the shares are nominal £1 value, then the issued share capital falls from £10,000 to £7,500 - while the number of issued shares falls from 10,000 to 7,500.
If the shares are nominal 10p value, then the issued share capital falls from £1,000 to £750 - while the number of issued shares still falls from 10,000 to 7,500

2,500 shares is still 2,500 shares, at whatever nominal value. It's just that it's a bigger proportion of the total number issued.

It's more usual to see it the other way round - more shares are issued, and the proportion is reduced. But 2,500 is still 2,500.

[KevinCamaroSS]

If the shares issued reduce to 7,500 (by the company buying them back) then, yes, each of the three remaining shareholders becomes a 33.33% shareholder. If all the shares are fully paid up then no liability arises.

Could the remaining 3 shareholders not buy the shares of the 4th shareholder instead?

[Ascayman]

KevinCamaroSS said:

If the shares issued reduce to 7,500 (by the company buying them back) then, yes, each of the three remaining shareholders becomes a 33.33% shareholder. If all the shares are fully paid up then no liability arises.

Could the remaining 3 shareholders not buy the shares of the 4th shareholder instead?

Thanks for the responses.

Are they not effectively doing that by forgoing their dividends in order that the 4th shareholder can get his money?

[TooMany2cvs]

Ascayman said:

Are they not effectively doing that by forgoing their dividends in order that the 4th shareholder can get his money?

Their dividends aren't being paid - they're being retained within the company, for the company to spend on buying those shares and cancelling them.
So the money simply isn't being declared as profit, and isn't being distributed.

If they were buying the shares, then there would still be 10,000 issued shares, but each of them would now own 3,333 instead of 2,500 - and instead of the company paying the leaving partner whatever price is agreed, the other shareholders would be spending their own personal taxed money.

I hope that these people DO understand the difference between the company's money and their money, right...? If not, then how these shares are bought is going to be the LEAST of their problems sooner or later...

[Alpinestars]

There are 2 ways to effect the commercial position you are trying to achieve. Each potentially gives a different tax result, and one is more complex than the other.

1. Each remaining shareholder buys the shares off the exiting shareholder. The exiting shareholder will have sold his shares, and any profit will be subject to capitals gains tax, after any reliefs, eg entrepreneurs' relief. Stamp duty at 0.5% would be payable by the remaining shareholders.

2. The company purchases its own shares followed by a cancellation. This is generally treated as an income distribution by the company, ie, like a dividend in the hands of the exiting shareholder. This might not be tax efficient for him or her. In certain circumstances, the buy back can be treated as capital, as in option 1. Stamp is still payable, this time by the company. You'd be wise to seek clearances from HMRC if you think you qualify for capital treatment, including clearances for transactions in securities. It's a lot more complicated than option 1.