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Alex J.
Alex J., Solicitor
Category: Law
Satisfied Customers: 3655
Experience:  Solicitors 2 years plus PQE
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I'm a sole owner of limited company. I would like to give 50%

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I'm a sole owner of limited company. I would like to give 50% of voting shares to new director who is coming on board. I do know it's not a best practise, but reasoning behind is that we are about to launch new product that we developed together and if it takes off he does not want to be left in the position where he does not have equal say in the direction.
One complicating matter is that there are assets in the company (cash) that only I should have access to. New director should have access to new business and direction from now on. Ideally we do not want to set up new company for this as it's not given new product will be successful.
What would be your suggestion to protect cash in the bank?
Submitted: 2 years ago.
Category: Law
Expert:  Jo C. replied 2 years ago.
Hi.
Thank you for your question. My name is ***** ***** I will try to help with this.
why should only you have access please?
Expert:  Alex J. replied 2 years ago.
Hi,
Thank you for your question and welcome.
My name is ***** ***** my colleague has asked me to assist you with this as I am a company law expert.
How much cash is in the bank? Does the company have any creditors?
Does the company have a separate trading business?
Kind regards
AJ
Customer: replied 2 years ago.

Hi Alex,

There is about £60-70k that needs be protected. According to my accountants I can draw £30k free of tax.

No creditors.

Not sure what you mean by "separate trading business"..

Daniel

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
I am just away from my computer I will be back in about an hour and will post a response.
Kind regards
AJ
Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
If the company has no creditors then I suggest you either:
(i) Trying ring these assets by issuing a preference that is entitled to the distribution of this capital;
(ii) Issue yourself with more shares that can be redeemed once this capital has been paid back to you.
What I need to understand is how has the company accumulated these assets, is it through a trade or other business? If so will it carry on that business in the future?
Kind regards
AJ
Customer: replied 2 years ago.

Hi AJ,

Thanks for the reply. Assets were accumulated thorough trade(developing web solutions) and company will continue doing the business.

Could also elaborate bit on the 2 options you've suggested?

Thanks Daniel

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
Essentially you are operating two seperate businesses under one limited company.
The issue you have here is that practically you could issue two classes of share and say that one share is entitled to dividends and capital from one business and the other from the other business.
The problem you cannot separate the creditors of the business. If the new business runs up debts or liabilities that it cannot pay in theory a creditor will be able to claim against the assets of the whole company. Baring that in mind would you consider forming a new company that is a subsidiary of the old company (i.e its shares are an assets of the existing company)?
Kind regards
AJ
Customer: replied 2 years ago.

Hi,

Just to clear up two business thing. Once other partner joins he will have same say as me in the current business company is doing so no need for distinction. That also answers the issue of debts and such.

Your suggestion:

(i) Trying ring these assets by issuing a preference that is entitled to the distribution of this capital;
(ii) Issue yourself with more shares that can be redeemed once this capital has been paid back to you.

Are making sense but would like to hear more details on each option, how it is actually works.

Daniel

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
No problem. I will write an explanation as to how to structure a company with two classes of shares. This may take a little while (as I need to refer to the Companies Act 2006) so pleased do not be concerned if you do not hear from me right away. I will revert to you within 24hrs.
Kind regards
AJ
Customer: replied 2 years ago.

Thank you.

Expert:  Alex J. replied 2 years ago.
No problem.
I will revert to you as soon as possible.
Kind regards
AJ
Expert:  Alex J. replied 2 years ago.
Hi,
My apologies for the delay I have had no internet access over the weekend.
I am typing a response to this now.
Kind regards
AJ
Customer: replied 2 years ago.

OK, thanks.

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
(i) Issuing different classes of shares:
You can amend the articles of association of the company to create a notional Class A share and Class B share.
Class A shares would have a preference that say they are entitled to the first £100K (or what ever the assets are worth) in dividend distributions and capital distributions until you have received value equivalent to your shareholding.
To do this you would need to pass a special resolution to amend the articles of association of the company and alter the share capital?
Bare in mind that creditors would still be entitled to claim against all the assets of the company regardless of how the debt had arisen.
(ii) You keep one class of share and you take more shares in the company that the pother shareholder. You agree that once a certain level of dividends has been paid out, the company could redeem the extra shares you have and cancel them. You would need to ensure that you had at least 51% of the shares to ensure that you could vote to distribute a dividend at your will.
Have you issued any shares yet?
Does the company have any creditors with security over the company assets?
Kind regards
AJ
Customer: replied 2 years ago.

Hi Alex,

No new shares issued yet, but I used to have partner previously so we already have 3 classes of shares set-up see here: http://www.xtmotion.com/compinfo_04973422_712-132527-46385838_1.pdf

No creditors.

Daniel

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
I will review this today and revert to you.
Kind regards
AJ
Expert:  Alex J. replied 2 years ago.
Thank you.
I have reviewed this.
You may have issued three classes but the shares seem to have the same rights.
What you would need to do is amend the articles and make one class of share different to allow it to have preferential rights over capital and dividend distributions.
What is the value of the assets you are trying to ring fence?
Kind regards
AJ
Customer: replied 2 years ago.

Hi Alex, I have reviewed accounting data and discussed this with my partner to be and we agreed on £93,000.

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
Would you be happy then if you took the first £93k in dividends to recompense you for these assets?
Kind regards
AJ
Customer: replied 2 years ago.

Yes, as long as Martin(new partner) can also receive dividends in the mean time. i.e. solution where I need to take full 93k out before Martin can receive money/dividends would not work.

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
What if you took a higher dividend? for example you split them 2/3 to 1/3 until the asset was repaid?
Alternatively if the company has no creditors? You could declare a distribution of the assets to you and then take a charge or debenture over the assets as security - you would not actually then be repaid until the company is sold or has sufficient funds?
Kind regards
AJ
Customer: replied 2 years ago.

1/3 & 2/3 split would not work, but other option sounds ok. How would "declare a distribution of the assets to you and then take a charge or debenture over the assets as security" work in real life?

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
Before he becomes a member of the company, you get the company to declare a distribution to you, as the sole shareholder, of the value of the asset.
The company does not then actually pay this to you, but it is instead registered as debt in the company accounts in favour of you. You then get the company to give you a charge (debenture) over those assets as security for your debt.
The advantage of this would be if the company ever went insolvent you would have security. This would only work if the company has no creditors. You would also need the advice of an account to make this work.
Kind regards
AJ
Customer: replied 2 years ago.

Hi Alex,

According to my accountants this option will cause that I'm taxed on the money I'm trying to protect. In that case I might as well just take money out and put them back as loan. So no acceptable solution I'm afraid.

Are the option you sugegsted previouly

(i) Issuing different classes of shares:
You can amend the articles of association of the company to create a notional Class A share and Class B share.
Class A shares would have a preference that say they are entitled to the first £100K (or what ever the assets are worth) in dividend distributions and capital distributions until you have received value equivalent to your shareholding.
To do this you would need to pass a special resolution to amend the articles of association of the company and alter the share capital?
Bare in mind that creditors would still be entitled to claim against all the assets of the company regardless of how the debt had arisen.

(ii) You keep one class of share and you take more shares in the company that the pother shareholder. You agree that once a certain level of dividends has been paid out, the company could redeem the extra shares you have and cancel them. You would need to ensure that you had at least 51% of the shares to ensure that you could vote to distribute a dividend at your will.

Not viable?

Expert:  Alex J. replied 2 years ago.

Hi, Thank you. The option of issuing different classes of share is viable, but we had previously discussed that your partner would not be prepared to agree a circumstance where you had a preference over the dividends until you are repaid the equivalent of £93k? IAre you able to accept a scenario where you receive a higher dividend until the company is repaid? You can through different classes of share ring fence these assets (by create a class of share that has a preference on parts of the company's capital), but it will not ring fence them from the creditors - so what is the risk that this new business will create creditors that may wish to claim against these assets if you cannot pay them for some reason? Kind regards AJ

Customer: replied 2 years ago.

Hi, Is it a must that I would need to take out £93k first or it would be up my discretion and I could agree that Martin can get some dividends even before I take out full £93k?

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
You could delcare the dividends and have them build up in the company accounts as a debt, you would then be a creditor of your own company.
The preference share could say for example they were entitled to 50% of all dividends up until £93k, the normal which you and the other shareholder would hold would be entitled to the other 50%. You would then effectively get 75% of all dividends until your preference shares were paid the equivalent of £93K at which point they would be redeemed.
You need a shareholders agreement as well to ensure that you could force the dividend distribution.
Kind regards
AJ
Customer: replied 2 years ago.

If I were to retain 51% until the point £93k is paid off, could I then decide which shares get dividends paid off?

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
You can only decide which shares get dividends if you have different classes of shares.
With 51% you could block dividends being distributed, however if you both had the same class of share you would block the distribution for yourself as well.
Kind regards
AJ
Customer: replied 2 years ago.

Thanks, ***** ***** should do the trick, right?

I would own 51 of Ordinary shares and 100 of A ordinary shares Martin will get 49 of Ordinary shares and 100 of B ordinary shares. On shareholders meeting we will then vote as needed to pay out more on shares A and less on shares B until such a point as shares A received £93k more than shares B.


So I think what we need is Shareholders agreement reflecting that ordinary shares will be split 50/50 once shares A were paid out £93k more than shares B. Can you help with drafting that?

Daniel
Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
You would need to amend the articles of association to say that:
- A and B Ordinary Shares have no voting rights;
- Ordinary shares will only pay dividends when the £93k is repaid;
- A and B shares have different rights to dividends e.g A gets twice what B gets.
Ideally you should have a shareholders agreement. If anything to agree an exit strategy i.e drag and tag along clauses.
Unfortunately we cannot draft documents in this site. If you contact the Law Society they will be able to recommend a company law solicitor. This structure is fairly straight forward and if you use a solicitor outside central London it will be relatively in expensive. http://solicitors.lawsociety.org.uk/
Kind regards
AJ
Alex J., Solicitor
Category: Law
Satisfied Customers: 3655
Experience: Solicitors 2 years plus PQE
Alex J. and other Law Specialists are ready to help you
Customer: replied 2 years ago.

Ok thanks, ***** ***** would it cost if you were to write it outside of this site?

Expert:  Alex J. replied 2 years ago.
Hi,
Thank you.
I am afraid I cannot accept work outside the site.
You should formally instruct a solicitor as they will have the benefit of indemnity insurance in the event that anything goes wrong.
Kind regards
AJ
Customer: replied 2 years ago.

Ok, thanks