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Buying out a shareholder on divorce - company reorganisation - introduction

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Where a husband and wife who hold shares in a family company divorce, it may be impossible to run the business effectively without one of them leaving the company. Where, as is frequently the case, the departing spouse wants cash for their shares, it may be possible to achieve this through a company reorganisation by way of a share exchange. In this way the remaining spouse can buy out the departing spouse without incurring any charge to capital gains tax and without using their own resources.

For example, assume that the shares in Oldco Ltd were held as follows:

  • 50% Mr Archer
  • 50% Mrs Archer

Mr and Mrs Archer are divorcing. Mrs Archer wants to leave the company and sell her shares in Oldco Ltd. Mr Archer wants to buy her shares and continue running the business. He forms another company, Newco Ltd which acquires all the shares in Oldco Ltd. Newco Ltd pays Mrs Archer cash for her shares and issues shares to Mr Archer in exchange for his. The cash for the purchase of Mrs Archer's shares can come either:

  • from the cash reserves of Oldco Ltd after Newco Ltd has taken it over;
  • or from a bank loan, for example, made to Newco Ltd and secured against the assets of its new subsidiary.

An alternative to a company reorganisation is for the company to purchase its own shares. If the conditions for a company purchase of own shares are met, consideration should be given to this method of buying out a shareholder on divorce as a potentially cheaper and easier solution than a company reorganisation.

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