leave the business the directors remembered that those provisions would be triggered.
An issue
arose because NoReserves’s articles of association specified that NoReserves would be the buyer of the employee’s shares.
English law limits the
circumstances in which a company can buy back its own shares – if a company has “distributable reserves” (net accumulated profits) then the process is relatively straightforward, but NoReserves did not.
There are other routes available, but they are expensive and not realistic for such a small buyback. Even the most accessible (a reduction of capital using the out of court method) requires the company’s directors to swear a declaration that, given its likely liabilities over the next 12 months, the company is solvent – and for a relatively early-stage company, as No Reserves was, this is often not an option. The end result was that the employee left the business with their shares.
The best way to avoid this problem is to have the articles of association be more flexible as to the identity of the buyer(s), and have potential buyers who are not bound by the same rigorous requirements as the company is when it comes to buying the company’s own shares. Typically the other shareholders of the company might be given the ability to act as the buyers, either before or after the shares are offered to the company. Alternatively, some all-purpose language could be used that would give the company a period in which it could attempt to locate a buyer for the shares.
WidowsPique Ltd.
Companies with leaver provisions generally also have a general prohibition on transfer of shares, other than with the permission of the company or a major shareholder.
This again helps to control
the shareholder base – some minor movement of shares to family members or trusts for tax planning is generally allowed, but overall the company can keep a tight rein on its capital.
Before WidowsPique Ltd. began to issue shares to employees, it amended its articles of association to include leaver provisions and a general prohibition on transfer. The provisions that were inserted were sensible, but the company and its advisers did not conduct a full review of the other provisions of the articles of association. As a result no change was made to the standard article on “transmission”, that allowed shares to pass from a shareholder to their beneficiary by operation of law when they died.
32 entrepreneurcountry
This issue came to light when one of the founders died, leaving to his widow shares that had a special right to appoint a director to the board of WidowsPique. The widow argued that transmission of the shares occurred automatically on death, and under WidowsPique’s articles therefore entitled her to take ownership of the shares, so even though the leaver provisions purported to apply (death was one of the “good leaver” events) the shares had already moved on. Those provisions could only apply to a shareholder’s death where there was no transmission of the shares. She then promptly appointed herself as a director, much to the consternation of the others.
This argument may not have held up in court, but it was by no means a certainty that it would not. The
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60