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Getting rid of a shareholder who wants cash - company reorganisation

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Getting rid of a shareholder who wants cash - company reorganisation - introduction

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Where there is a dispute between shareholders, and the other shareholders want to get rid of the disruptive shareholder by buying them out, it may be possible to achieve this through a company reorganisation by way of a share exchange. In this way the remaining shareholders can buy out the departing shareholder 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:

  • 25% Mr Archer
  • 25% Mr Brown
  • 25% Mrs Clarke
  • 25% Mr Davies

Mr Archer can no longer get on with the other shareholders and there is a great deal of friction between them. This is adversely affecting the running of the company. The other shareholders persuade Mr Archer to leave and to sell his shares in Oldco Ltd. The other shareholders want to buy his shares and continue running the business. They form another company, Newco Ltd which acquires all the shares in Oldco Ltd. Newco Ltd pays Mr Archer cash for his shares and issues shares to Mr Brown, Mrs Clarke and Mr Davies in exchange for theirs. The cash for the purchase of Mr 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 getting rid of a shareholder who wants cash for their shares as a potentially cheaper and easier solution than a company reorganisation.

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