Company owners considering selling-up should have done their homework when it comes to who owns what. If not, they could leave themselves open to major problems, warns Paul Hardman, Corporate Finance specialist with Morgan Cole Solicitors, Bristol.

In the last 12 months, we have completed 17 significant company disposals and acquisitions in the South West.  It’s been a busy time for our new Temple Meads office and the majority of deals have gone smoothly.

But that’s not been the situation for one in four cases – the common factor being the issues of each company’s previous buy-back of shares.  Our experience in each of these cases has reinforced in us the need to get the message across to company directors that, well ahead of any sale of their business, they have to get right the issue of any share buy-back.  Many company matters can be tackled by managing directors on a do-it-yourself basis – but not this one.

Share capital is an area that needs care – remember you are selling the company and that means the individual shareholders are selling their separate shareholdings.  If they don’t own their shares, or if there are others that you did not realise are shareholders, you have a problem that must be sorted out before the sale can go through. The issue comes to light most often when a shareholder leaves or wants to sell and when the only realistic buyer of those shares is the company itself. 

There is a rule which is as old as joint stock companies themselves; that is that a company simply cannot reduce its share capital.  Therefore a creditor doing business with the company has a right to know that when the company records show that its share capital is say £10,000 that is indeed it share capital and it has not been returned to the investors (shareholders) in the meantime.

This rule is subject to exception so that a company, can buy its own shares but only if it follows the required procedures and (normally) the purchase is funded out of profits.  If these procedures are not, the buy back must be declared void.  

So what happens when you come to sell your company, and it is found that there are not say five shareholders as originally thought but six of them?

The sellers have a problem.  The 5 sellers have to track down the 6th and persuade him or her either to honour the original deal or join in the sale.  This could be difficult – it could be many years before that he left; he could have moved address; he may want to exploit the position he is in. And if he or she agrees to honour the original deal he will want to ensure that his tax bill is not higher than as if the original deal was effective and the original deal must be re-done.

This time it has to be procedurally correct and there must be sufficient profits to fund it.  The issues are complex and above all costly. South West business owners owe it to themselves to identify and sort out any issues before they get too far down the sale track.

For further information contact Paul Hardman on 0117 374 6002 or paul.hardman@morgan-cole.com.