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Alex J.
Alex J., Solicitor
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Business Shareholder Resolution

Resolved Question:

Hi there, thank you for taking the time to look at my query, I'm hoping you can help My problem in a nutshell:

I set up a business with a friend / business partner in 2010. We are currently 50/50 partners, but he believes that the time & effort he is putting into the business is greater than mine, and would like me to give him a large portion of my shares. There is no share agreement beyond the standard ones supplied for Companies House

Details:



  • - The Business takes about £70k P.A. as of 2015

  • - My partner is paid for his time and effort as a portion of our sales, 25% which equates to £16k / year

  • - I have offered several times to increase this but he would prefer a higher proportion of shares

  • - We are each owed dividends from the previous year's accounts, totalling more than the value of cash currently held in the company

  • - The business is a limited company, we each own 50 shares in the company, my partner's are all unpaid shares, I own 1 paid share and 49 unpaid shares


I would like some advice as to possible ways forward. I don't view gifting my shares to my partner as an option, as I started the business and have been involved throughout, even if my capacity has not been the same as his, I feel manipulated into this position as he could have made it clear before buying in. However if I'm wrong on this please tell me!

Does my partner have a legal claim to my shares if he feels I am not putting in the same time or effort?

What protection do either of us have?

Can my partner force me in any way to give up some of my shares?

My current view is that if we are not able to negotiate a compromise, one of us can buy the other out, or we can dissolve the company.

Story in more detail:



  • - I came up with a business idea while at University, wrote a business plan, spoke to a friend (P) and he jumped aboard: we agreed a 50/50 share split, he couldn't afford to pay me shares so I provided the seed money then went on a business incubation course that was provided with a grant by my University

  • Business starts, it's a slow grower, so we both take full-time jobs, our roles evolving I continue full-time work, changing roles to learn skills more relevant to the business, while P is able to scale back his work and dedicate more time to the business, eventually going full-time on the business. I am immensely proud that we have created something that managed to support one person fully, but it cannot support both of us, so I continue to work full-time while doing evenings, weekends, lunch-times etc on the business

  • - In 2014 P is able to pay me for the 50 shares agreed. I sell them to him at the rate agreed originally (£1,500) - he was relatively annoyed that he had to pay for them at this point, and raised concerns, but we continued

  • - P continues to be paid a salary, while I forfeit any income from the business, including dividends, to help keep the business in best financial shape while I am working

  • - I discussed raising P's salary to make him more comfortable, along with how best I can be evolving my role now that we've reached the next stage of business (trying to expand our customer base). I email him several times to this effect but it is ignored

  • - P contacts me to say he feels he is spending more time & effort on the business than I am able to and that he should own more shares

  • - We argue over shares, over the fact that I spend less time and that P does not feel valued. I believe that salary should be reflecting time, but am open to selling some of my shares to P

  • - I suspect P is not willing to even discuss buying any of my shares and believes that he is owed them, as he has threatened to walk away should we not reach an agreement that suits him


 

Thank you for your time reading my essay! Please let me know if you require any further information I look forward to hearing from you, Adam***@******.*** 0790(###) ###-####/span>

Submitted: 1 year ago.
Category: Law
Expert:  Alex J. replied 1 year ago.
Hi,
Thank you for your question and welcome.
My name is ***** ***** I will assist you. I am a company law expert.
In a nutshell the answer to your question is he cannot force you to sell him your shares or force you to allow him to issue more shares.
If you went into business as 50/50 partners, and there is no contractual obligation on you to spend time and effort in the business then it is quite frankly his bad business bargain. He should have signed a shareholders agreement agreeing what each party would bring to the equation.
You are correct your options are:
- Issue him with more shares/ sell him shares;
- One buys the other out;
- The company is dissolved either by agreement or court order.
On that basis can you work with him going forward? Would you accept being diluted down? I.e keeping the same number of shares but issuing him more.
If you are going to stay in the company and it is no longer a 50/50 arrangement, then you must have a proper shareholders agreement to prevent him from exerting his control over the company and giving you contractual for example right to remain as a director (takes 51% of the voting share capital to remove a director, but you can change this in a shareholders agreement) and right to participate in the decision making.
I will be away from my computer until 1pm, but if you can let me know in the mean time the information I have requested, I provide a further response on my return.
I look forward to hearing from you.
Kind regards
AJ
Customer: replied 1 year ago.

Hi AJ,

Thanks for getting back to me so quickly

I had not considered the share dilution option as I felt manipulated into this position by my business partner; I was not aware that we could construct a shareholder agreement that would protect me

Am I correct in thinking that I could also add a clause that I cannot be forced to sell as a minority shareholder? I am concerned about his motivations as the way this has been approached has been to move in slowly; I would hate to dilute my shares then be forced to sell for a smaller sum

Thanks,

Adam

Expert:  Alex J. replied 1 year ago.
Hi,
Thank you.
You cannot be forced to sell or dilute your shares.
However if he ends up owning more than 75% of the voting share capital he could then further dilute you shareholding without your consent. If you sign up to a share holders agreement it can include provisions that stop further dilution without consent. You could include various clauses for example a pre agreed mechanism for valuing the company if you fall out, or if one party wants to sell their shares, they must offer them to the other party first.
As a starting point you could say you will agree to his demand on the condition that he accepts terms of a shareholders agreement that you have prepared (and ideally he pays for).
At the moment the company is deadlocked.
Can you work with him going forward?
Kind regards
AJ
Customer: replied 1 year ago.

Hi AJ,

I understand that by owning 75% of voting capital he would be able to vote me out - does this imply that we could set up an arrangement of 50/50 voting shares, with additional non-voting shares that cannot remove me? Essentially having him as both a voting and silent partner

Agreed that a pre-determined way to value the company in the case of fallout is probably a good idea given the circumstance

We could potentially work together but at the moment he will not listen and my input in the company is being ignored, so it seems that unless I am willing to dilute there is no way forward - I have argued that if he wants to feel more valued we should increase his salary and other benefits but he does not agree. I don't know if you have a view on this?

Thanks,

Adam

Expert:  Alex J. replied 1 year ago.
Hi,
Thank you.
Yes you could set up an arrangement whereby the company can issue two classes of share. One a voting and one non voting but has greater rights to dividends for example.
An alternative is to just say you have the same class of share - but he can never dilute your shares without consent, you make this a contractual right under the shareholders agreement.
Personally my view is you should not give up your shareholding for work he has done historically - if he wants more shares for that work he should have negotiated it from the off. You cannot change an agreement just because you feel like you got a bad deal. If he wants more shares going forward you should agree a shareholders agreement and clear key performance indicators which might reward for some extra equity, if that is what you want to agree.
This individual needs to appreciate that if you are going to accommodate him, it has to be on the basis of a compromise.
Has he even said how many shares he wants?
If you could rate my answer I would be most grateful.
Kind regards
AJ
Alex J. and 4 other Law Specialists are ready to help you
Customer: replied 1 year ago.

Hi AJ

I've rated excellent, thank you for being so helpful with this matter so far

My partner has so far offered a split of 95/5 based on time & effort; I think he is expecting I negotiate him down, but I cannot see how there is any benefit to me continuing that course of action unless I am able to negotiate my required time down to zero (or close to)

I'll take another look at shareholder agreements in the mean-time but expect it will come to closing the company as I do not think he will budge from wanting the dilution of shares

Thanks,

Adam

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