QUESTION: I along with two friends have an online retail business that we have owned equally and operated since our university days. One of the other shareholders does not agree with the direction we want to take the company and intends to sell her shares. However, the other shareholder and I do not have enough personal funds to acquire her shareholding. Are there any alternative ways to exit the shareholder?
ANSWER: Your situation is not uncommon, and a Company Purchase of Own Shares (CPOS) might be you’re your answer. If the company is able to purchase the dissenting shareholder’s shares back this will leave the remaining two shareholders with an equal 50% shareholding in the company. Although the company will be worth less, you will own a greater share of it effectively leaving you in exactly the same position, but without the dissenting shareholding.
The existing shareholder will want to make sure that the money that she receives for her shares are taxed as a capital gain where rates are between 10% and 20% rather than as income where rates could be as high as 39.35%. HMRC however have a body of anti-avoidance legislation to make sure that only genuine capital transactions are taxed as such and a CPOS situation is fraught with difficulty.
There are several conditions that must be complied with to obtain capital gains treatment from the purchasing company’s perspective which centre around the transaction being for the benefit of the company’s trade. HMRC set out certain situations in which they consider the commercial interests of the company are satisfied and one of these is a shareholder disagreement which is the situation you find yourself in.
From the vendors point of view there are five conditions which must be met, the most important ones being that the shares must have been owned by the vendor for five years, the vendor cannot be ‘connected’ with the company post sale and that the purchase of the shares by the company should not be part of an arranged scheme which essentially leaves the vendor or one of her associates continuing to have an interest in the company in the period within one year of the transaction.
There are also Company Law requirements to be satisfied and I would urge you to instruct a solicitor well versed in Company Law, ideally someone who has undertaken CPOS transactions in the past.
The main Company Law conditions are that the company must have enough distributable reserves (retained profit) to make the purchase and its Articles of Association give the company the power to buy its own shares back.
Provided your circumstances allow, it may be possible to exit the dissenting shareholder in your company in a manner that provides her with the same capital gains tax treatment as she would have received on a sale to a third party.
Importantly however, by going down the CPOS route, you and the other remaining shareholder have avoided the entry of an unwanted shareholder into your company without having to utilise personal funds.
Given the tax and company law requirements along with the particular procedures required to execute a CPOS transaction, I recommend that you engage your trusted business advisers to ensure you are not creating unexpected tax charges.
- Feargal McCormack (f.mccormack@fpmaab.com) is managing partner of FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
