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Share play

So far in this series of articles covering the main stages in the process of introducing a share purchase arrangement to a limited company, we have looked at identifying the need for such an arrangement (if, indeed, a need exists in a particular company) and identifying the quantum of that need (that is, placing a value on the company as a whole and on the individual shareholdings).

I will now look at a part of the process which will be much closer to the hearts of most IFAs – providing the funding by which the shares can pass from the deceased&#39s beneficiaries to the ultimate holders.

Take a company, Owl Sewerage Services Ltd, with the shareholdings in table A valued professionally for the purposes of considering a share purchase arrangement (see my last article on the involvement of the company&#39s accountant).

From our questioning, we discover that Lynne and Paul would like, on the death of either of them, his or her shares to pass to the other and this is what they have arranged through their wills.

Moreover, such a transaction meets with the agreement of Trevor and Joanne. However, on the death of either Trevor or Joanne, they have only just realised during our questioning that their shares would pass to their respective spouses although both they and their spouses had rather taken it for granted that they would easily be able to realise those shares immediately for cash.

Those initial discussions swiftly reached the conclusion that the obvious buyers for these shares would be the surviving shareholders, who acc-ept that they would be highly unlikely to have the necessary funds available to meet the fair valuation price at that time.

Clearly, we do not have to deal with the transfer of either Lynne or Paul&#39s shares on either of their deaths as these shares are already destined to pass to the desired ultimate beneficiary. That leaves us having to consider only the shareholdings of Trevor and Joanne.

Even though they have specified that the surviving shareholders should be given first option to buy the shares, it should not be assumed these options must or should be given proportionately although this will usually be the case.

Let us suppose that proportionate options are decided upon here. What does that mean on the death of Trevor? His 400 shares would then be offered as follows: 200 (that is, 50 per cent) to Joanne as she has 50 per cent (300 out of 600) of the total of the survivors&#39 shares, 100 each to Lynne and Paul as they each have 25 per cent (150 out of 600) of the total of the survivors&#39 shares.

This would leave the respective shareholdings as shown in table B (assuming that funding was available for the survivors to purchase the shares) Joanne, Lynne and Paul must be made aware from the outset of the shift in balance of power. From the current situation, where Trevor, although the biggest single shareholder, requires the support of any of the other three shareholders to gain a majority, there would now be the situation where Joanne, although the biggest single shareholder, has only equal votes to Lynne and Paul (assuming they will frequently vote together, as seems likely). I am not suggesting this is a problem (although 50/50 votes in a small limited company can frequently cause problems) simply that all parties must be aware of the fact.

Working through a similar process on the death of Joanne, the resultant shareholdings would be (with a little rounding to whole numbers) as shown in table C.

Here, the outlook is arg-uably much less favourable for Lynne and Paul as, although they have acquired a bigger number of shares, they have in fact lost any possible influence on the outcome of the company&#39s voting decisions.

In fact, it is more than likely that a proper valuation of their shareholdings would reveal a figure much lower than the theoretical amount of £214,000 and, indeed, could even be lower than their initial holding valued at £150,000 due to the shift in the balance of power.

This potential outcome must be carefully considered by all parties before we pro-gress properly to the funding stage. Is this the outcome acceptable to all parties?

If not, then a different distribution of shares should be agreed at outset which ach-ieves the desired result and here, of course, the options are numerous but it is important here only for the principle to be identified and understood – not only by the IFA but, even more importantly, by the individuals concerned.

So, moving on to the funding of the transfers, and working for these purposes on the assumption that proportionate distribution is agreeable to all parties, the amounts in table D would be needed by each individual on the death of each shareholder.

Next time, we will look at how each of these shareholders might be able to provide these funds.

Keith Popplewell is managing director of Professional Briefing

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