Disposal of shares in a company

[cyclesmith]

SCENARIO:
I have a situation where two shareholders in a company have issued their shares in their respective trusts (therefore the trusts own their shares in the company). They each are a trustee of their respective trusts. One of the trustees (shareholder) wishes to "get rid of his shares" or "cancel his shareholding" as he likes to put it, without financial compensation. The company is currently in great financial difficulty and at this stage it doesn't seem as if it will recover and there is a very good chance that the company will be liquidated. His part of share capital on the books equals R10. He has no loan account. There are no other shareholders.

QUESTIONS:
a) From a legal perspective, could we simply draw up a disposal agreement whereby the remaining shareholder acquires the shares of the other shareholder at a value of R10, with no further/ future claims?

b) What would the tax implications be ito the outgoing shareholder's trust, who is the beneficial owner of the shares?

c) Let's say, for argument's sake, that the company makes a recovery and starts trading profitably in the future, could the beneficiaries of the trust have any claim against the trustee who opted to dispose of the shares, or the company or the shareholder who bought the R10's shares?

 

[Jonathan Arumugam]

By no means to be taken as gospel... you should definitely consult a corporate lawyer

I can help with a):

You can draw up an agreement in terms of which Shareholder 1 sells his shares back to the Company (a repurchase by the company) for R10. The money will actually have to be transferred. Depending on the status of the company (whether it is Regulated), you might need approval from the TRP if the shares being repurchased by the company are more than 5% of its issued shares (see section 48(2)(a) and 48(8) of the Companies Act).

A subsequent transaction would be Shareholder 2 subscribing for the shares disposed by Shareholder 1.

Both transactions may be done simultaneously.

I think Shareholder 1 selling the shares to Shareholder 2 might be disadvantageous in terms of tax - and that's the extent of my tax knowledge

 

[Venomous]

What will happen to the debt?

 

[Greg C]

What will happen to the debt?

So from a debt perspective. Remember a company is a seperate juristic entity. So are individuals (natural persons)

The issue of debt comes where both the shareholders have signed any form of guarentee or surety backing any form of credit/finance acquired through financial institutions.

In all likelihood, he signed surety in some of the debt acquired by the business. In which case :

1) Apply to the institution that a change in shareholding has occured, and that the surety/security they have in place against the debt (ie the person trying to remove himself from the co) is to be released. The bank or financial institution has NO OBLIGATION to release the surety, an application is made for surety replacement ie the new shareholder to be 100%, needs to be able to afford the credit/debt on his/her own capacity severably and liably and the bank to accept this change. If accepted, they will issue you a letter of release of said security
Noting THOUGH. It is not an obligation. The bank can enforce to keep the debt and security as is and you are thus forced to remain liable for any debt against the business IF you signed guarantor or surety. It is legally enforcable

Outside of this process, in practical sense, unless the new shareholder can afford the debt in his own capacity and is deemed to be so from a financial credit process, there is nothing you can do to force release UNLESS the debt is called up upon, the business is declared insolvent, the business liquidates accordingly and the debt is then attached to the individuals. The individual has the option to apply for debt refinance and or sequestration.

Hope this helps alittle

 

[This_isKat]

SCENARIO:
I have a situation where two shareholders in a company have issued their shares in their respective trusts (therefore the trusts own their shares in the company). They each are a trustee of their respective trusts. One of the trustees (shareholder) wishes to "get rid of his shares" or "cancel his shareholding" as he likes to put it, without financial compensation. The company is currently in great financial difficulty and at this stage it doesn't seem as if it will recover and there is a very good chance that the company will be liquidated. His part of share capital on the books equals R10. He has no loan account. There are no other shareholders.

QUESTIONS:
a) From a legal perspective, could we simply draw up a disposal agreement whereby the remaining shareholder acquires the shares of the other shareholder at a value of R10, with no further/ future claims?

b) What would the tax implications be ito the outgoing shareholder's trust, who is the beneficial owner of the shares?

c) Let's say, for argument's sake, that the company makes a recovery and starts trading profitably in the future, could the beneficiaries of the trust have any claim against the trustee who opted to dispose of the shares, or the company or the shareholder who bought the R10's shares?

My views:
a) Yes.
Although Jonathan's proposal is an option it may not be desirable because (i) there is a likelihood that the company will fail the solvency and liquidity test required before buy-back, (ii) if the buy-back is successful, there is no incentive for shareholder 2 subscribing for shares since shareholder 2 will own all the issued shares, and (iii) the subscription price on issue must constitute adequate consideration (see section 40(1) of the Companies Act) - depending on the valuation of the company this might be more than R10.

b) I would imagine CGT - maybe consider consulting a tax lawyer / practitioner.

c) Unless there is fraud on the part of the trustees or they acted outside their powers and duties as set out in the Trust Deed, the beneficiaries can't claim against the trustees.

NB - this does not constitute legal advice

 

[Greg C]

My views:
a) Yes.
Although Jonathan's proposal is an option it may not be desirable because (i) there is a likelihood that the company will fail the solvency and liquidity test required before buy-back, (ii) if the buy-back is successful, there is no incentive for shareholder 2 subscribing for shares since shareholder 2 will own all the issued shares, and (iii) the subscription price on issue must constitute adequate consideration (see section 40(1) of the Companies Act) - depending on the valuation of the company this might be more than R10.

b) I would imagine CGT - maybe consider consulting a tax lawyer / practitioner.

c) Unless there is fraud on the part of the trustees or they acted outside their powers and duties as set out in the Trust Deed, the beneficiaries can't claim against the trustees.

NB - this does not constitute legal advice

Hehe spot on about the NON LEGAL ADVICE. But atleast points you in a relatively decent direction. CGT would apply if you could provide a relative market value for the shares. Which would need a valuation on the business from a registered auditor/accountant. Otherwise spot

 

[f2wohf]

Also don't forget to declare the Securities Transfer Tax within 30 days of the sale.

It will be free as the threshold is R100 of tax payable but the share transfer could be invalidated otherwise.

Don't forget to update the share certificates and share register as well.