Private limited company shareholder exit

Hi all,
This will no doubt sound like a silly question but i need to put my mind at rest about something…

So I own a tiny private limited company and i am a director and so is my elderly parent who originally set up the company yonks ago. There are no other directors.

I have a 74% shareholding in the company and my sister, who has nothing to do with the running of the business and lives abroad, owns the other 25% with aforementioned retired parent owning the remaining 1%.

My question is this…. If my sister one day for whatever reason decides she wants to “exit the business” could she force the company to buy her shares back, thus costing the company tens of thousands that it cannot afford?
Or to phrase it differently, what would her options be if she wanted to sell her shares?
Keeping in mind she’s not a director and has zero input or interest in the running of the business.

I wouldn’t want to buy her shares and as director and majority shareholder I wouldn’t want the company funds to be spent on buying her shares as we need that money to operate so if she’s determined to sell her shares and exit then what happens?

What do the Memorandum and Articles of Association for the company have to say? Is there a shareholders' agreement in place?

Hi mathepac, no there is no shareholders agreement. I’m not sure about the memorandum and articles of association though.
My accountant said I COULD buy the shares off her and the company COULD buy the shares off her or she could sell them to a 3rd party.
But my concern here really is can she force the company to buy them? As in, can she cash them in and take the value from the company account or as a director can i block that from happening, seeing as she is not a director herself?

Hi Red

Forget the legalities for the moment.

Your parent set up the company. Did he or she choose to give you 74% of an asset and your sister 25% of an asset?

If so, your sister is entitled to the benefits of owning 25% of the company. Whether she works in it or not.

Directorship is a separate issue from being a shareholder and has no bearing on it.

You say it's a tiny company. Does it have assets or value?

Your sister is probably entitled to sell her shares but I doubt that the company Memorandum or Articles requires the company or you to buy them.

She could sell them to a third party, but I wouldn't buy a 25% shareholding in a small company and I doubt many people would.

If you get on well with your sister, why don't you raise it with her and say that you want to tidy up the shareholding. You will buy it from her and pay her over a number of years.

There are rules about "oppression of minority shareholders" but they would not really come into play unless your sister requests something and you deny it.

If you are unhappy with your sister having a "hold" on you, can you run the company down and start up a new company doing the same business?

Brendan

Hi Brendan,
Thanks for the reply. Back at the time my parents felt she might like to play a role in the business but she decided against it and no they have no issue with the company being mine and they had actually forgotten she was even a shareholder until I brought it up recently.
She’s also not seeking anything from it.
She’s not looking to “exit” or do anything at all to be honest.
And it’s a tiny company with very little in terms of assets.

So its just for my own security that I’m asking. So let’s say hypothetically god forbid we suddenly have a row and she says well im selling my shares now, what would actually happen next?

Am I to assume that there is no obligation on me or the company to buy them? That she would then either leave them in her name or sell to someone if someone wanted them?

If you have a row, she can't do anything much about it.

However, if she has no interest in them, why don't you try to regularise it now? She might die, and whoever inherits them might think that there is a pot of money for them.

It's also worth doing now while the company is not worth much. If you develop the company through reinvestment rather than through taking out the profits, then she or her beneficiaries might realise that the 25% share has value.

All in all, now is the time to fix this.

Brendan

Thanks Brendan, yes fully agree. The thing is, i assume i have to pay her full market value for the shares then and well basically the business doesn’t have much money to spare. So it would have to be me personally buying them then, so yes it’s something i could consider after buying a house. I’m currently attempting to buy a home.
My hope was that the company couldn’t be forced to purchase them from her anyway which i think/hope from what you’re saying is the case. That in itself is some sort of security but yes i realise this all needs to be resolved, somehow.

How much are the net assets of the company?

If the company is worth very little, she might be happy to gift it to you.

Brendan

Hi Brendan, would that include the bank balance? Or just assets such as machinery etc?

All the assets - what is the value on the balance sheet?
Is the balance sheet value of fixed assets historical or current?

Including the money in the bank account as well then circa 120k net assets. Tbh 2/3 of that is the bank account. Basically i am the company, like its not got anything much by way of assets. Its just me and an employee working very hard. Plus if anything happens we would owe him (the employee) 40k redundancy

Redder Than Red said:

120k net assets. Tbh 2/3 of that is the bank account.

Click to expand...

That is substantial enough. 25% of that is €30k.

Why are you leaving so much cash in the company? You should be taking it out in pension or salary.

Brendan

To be honest Brendan, that occurred to me but for the past handful of years the company just breaks even so my thinking was that if i increased salary it would mean company returned a loss. I was just reluctant to do that too often. Plus I try to keep imagining ways to reinvigorate the company in the future so it will need money to do that.
It always seems a shame to take an extra say 20k in salary and pay 10k in tax.
But at the same time this is why I’m so concerned about the company being secure.
Also i want money there to pay my employee redundancy if it ever is needed.

Just out of curiosity what exactly would happen if this imaginary row happened and she wanted to “cash in” her shares and exit? Am i safe enough thinking she cannot force the company to buy the shares? Is that a decision directors make? So in theory if she was a director this would be more of a worry than it is? Or am i wrong?

She cannot force you or the company to buy her shares.

But she could have nuisance value which is why you should address it.

Brendan

True! And thanks Brendan. Good site!

A 25% stake in a small trading company where the main shareholder / director "is the company" would be heavily discounted (>50%), notwithstanding nuisance value.

Also, valuation would be based on a multiple of maintainable profits, rather than the net assets.

Thanks Torblednam!

Provided you do not "oppress" a minority shareholder there is little that they can do. Further information on link below:


Jim Stafford