SEARCH, INDEX, UPDATES, CONTENTS, UNDERSTANDING, SHARE VALUATIONS
This is a very large and complex subject about which many books have been written. Our purpose here is to indicate some of the pitfalls which can occur in owning shares in a Private Limited Company. Many small businesses have to choose between operating as a Partnership, a Limited Liability Partnership or as a Limited Company.
Company Law treats a small company in much the same way as a multinational. Both types of company have an Issued Share Capital. There may be share different classes of shares, but both types of company will have some Ordinary Shares which carry the main voting rights. Each share will have the right to one vote.
A Public Limited Company may not be quoted on the Stock Exchange but most are, so for this purpose let us consider "Quoted plc" and "OurCo Ltd"
Quoted plc probably has thousands of shareholders, none of whom own more than 50% of the Ordinary Shares. Each shareholder has little power, and the company is run by the Directors who are appointed many shareholders voting together.
In OurCo Ltd the shareholders also appoint the Directors. Often the Directors are the shareholders, but they run the company under appointment by the shareholders voting in General Meeting. Shareholders can call an Extraordinary General Meeting at 21 days notice (or consent to short notice), and propose and pass a resolution for the removal of a Director.
If any one shareholder (or a group of two or more shareholders acting together) owns more that 50% of the Ordinary Shares, they will decide the vote. A single shareholder owning 49% of the shares can put forward a very persuasive argument, but may be outvoted and have no effect on the final decision.
Although it is possible to apply to the Courts to prevent or reverse behaviour which is oppressive to a minority, it is much better to ensure that agreements in respect of remuneration and other matters are agreed between the parties as early as possible, preferably in writing. Many small companies act on a very informal basis, indeed a sole shareholder may wonder how he can conduct a shareholders meeting, but the keeping of minutes and records to disclose a conflict of interest can be very important in resolving disputes.
If on a winding-up or outright sale a company would be worth £100,000, Mr A, a 49% shareholder, would receive £49,000 (ignoring tax etc.).
How much would you pay to buy 49 shares in OurCo Ltd from Mr A if Mr B owns 48 shares and Mrs B owns 3 shares? Mrs B will probably have more influence on the result of a vote than Mr A. That is why Mrs B is a connected person for tax purposes.
What discount would you apply to allow for the possibility that Mr and Mrs B might decide to continue trading for another 10 years or more, during which time OurCo might incur big losses?
Generally, it is very difficult to find a buyer for private company shares other than in an outright sale of the whole business to a third party.
The matter is further complicated because many private companies have a restriction in their Articles of Association requiring the directors approval to any share transfer.
If there are only two shareholders each owning 50 shares, who wins the vote if they disagree?
The low value of a minority holding can be of benefit in Inheritance Tax planning.
See also Limited Companies
Reminder - disclaimer applies. Please feedback your comments. This page was last modified 18 May 2002.