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Rakhi Vasavada
Rakhi Vasavada, Financial Advisor
Category: Finance
Satisfied Customers: 4496
Experience:  Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
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Dear Sir I wonder if I might pick your brain on a scenario

Resolved Question:

Dear Sir

I wonder if I might pick your brain on a scenario with the main enquiry of "Can it be done legally and with accounting best practice?" and perhaps even chat about this further if necessary

The majority Director-Shareholder A (55%) of a firm wants to build a sport hall to replace the current dome. The cost of this is £1m.

The Memo and Articles are such that although there is a majority shareholding at play, no large financial (or indeed other) decisions can be made without 100% vote from the Board of Directors (who also make up the remaining shareholding).

The majority shareholder has waived several dividends in the past but there is a shareholder's agreement which states that, should Shareholder A wish to release cash in the future, he can be paid a one-off dividend of £840K (the other shareholders would then sign a waiver should this take effect) from the distributable funds (which are very healthy).

However, Shareholder A does not want to pay tax, but would rather "utilise" this £840K towards the sports hall within the firm. (So not from distributable funds, but rather as capex from cash holdings.) He would then tear up the shareholder's agreement ref the £840K.


The other 45% shareholders do not feel £1m on a sports hall is a viable spend at all and also poses operational threats due to the timeframes involved and the loss of an important resource for that time, but this has left conflict. The 45% shareholders would rather this happen:

£840K paid out as a dividend. Shareholder A then pays tax and is left with c £570K. He uses this plus £430K of his own funds and buys £1m worth of the firm's "B" shares which are not dividend bearing and have zero votes.

This £1m share capital is then utilised to build the sports hall.

Would this work?

Thanks!
Submitted: 2 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 2 years ago.
Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

From what I understand from your question after going through it in detail, I feel Shareholder A is much better placed and well within his rights to do what he is attempting to do. Let me try and elaborate further.

To begin with, as I understand he has waived off several dividends and wishes to use "that" 840k towards buiding the hall. As for other 45% shareholders, they cannot force him to take distribution, pay tax and then utilize the money to build the hall. This is because, waiveing off was his legal right.

The other point that I do not agree with the 45% shareholders is -- from what it appears from your question, they are MORE against the Shareholder A not taking his distribution. Had they been opposed to the building of the hall itself, per se, they would have opposed the idea of Shareholder A taking distribution, paying taxes and utilizing that money.

Going further from here, the bone of contention is -- or rather should be -- does your Memo or articles alow taking this decision ? If Yes, the shareholder A can go ahead with his method. If Not, then obviously there would be no 100% voting in favor of this and the building of the hall can get stalled. This is because by not voting 100% in favor of this method is possible, but forcing the Shareholder A to take the distribution something which is not possible.

So, there are all chances that (1) Shareholder A will have his way; and (2) The building of the hall itself will get stalled because the Shareholders may not vote 100% as required but at the same time they cannot force Shareholder A to take compulsory distribution.

I sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,
Customer: replied 2 years ago.

Hi Rakhi


 


Thanks for your help. Once again you have offered some excellent advice.


 


I assume the Shareholder's Agreement that £840K can be paid in the future needs to be examined closely.


 


I fully appreciate that one cannot force a distribution, but given that this £840K has been waivered off and remains simply in distributable funds, how else can Shareholder A utilise these funds given (a) he does not want to receive this as a dividend and (b) the articles require 100% vote for any financial (and operational) decisions.


 


Given (a) and (b) above he will simply be left with an agreement that he can take these funds as a dividend (when and if he chooses), but no recourse to push though his own agenda on an investment that will not receive the requisite votes. The funds shall just remain in distributable reserves and it will be a stalemate.


 


Thanks again!


 


Regards


 


Ian


 


 

Expert:  Rakhi Vasavada replied 2 years ago.
Dear *****,

Hello and welcome.. Thank you for your follow up reply.

I understand and agree with your situation. In such a case, there are only two possibilities.

1. The Shareholder A can voluntarily choose to take the distribution.

OR

2. The funds can be used only wherein 100% shareholders agree.

Apart from this, I believe that your shareholder's agreements need to be closely scrutinised and if the need be amended because most of the times, there are high chances that you may reach a deadlock over several issues. Not always 100% agreement is possible on any issues.

I sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,

Rakhi Vasavada, Financial Advisor
Category: Finance
Satisfied Customers: 4496
Experience: Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
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