your fashion business
the small issue of company law. Company law provides that payment for a share buyback must be made by the company in full at the date the shares are bought back. This means that deferred payments paid on days following the date of the buyback are not permitted (and advance payments are also unlikely to be acceptable). Therefore, the following must be considered: 1. The structure to be put in place to allow FashionCo to use its funds over a period of time to buy back the shares without falling foul of company law; and 2. The terms for the continuing, as well as the exiting shareholder, and the documentation needed to achieve this.
This can be achieved in one of two ways as follows:
Structure 1 – use of a NewCo
In the simplest of terms, a NewCo is established by Shareholder A. NewCo makes an offer to buy all of Shareholder B’s shares in FashionCo in exchange for deferred cash paid to Shareholder B. At the same time, NewCo will often also make an offer to Shareholder A to buy all their shares in FashionCo in exchange for being issued shares in NewCo. There is no buy back by FashionCo (as NewCo is the purchaser making deferred payment to Shareholder B) so there is no problem under company law.
Considerations for Shareholder A The main issue here is tax. Clearance should be sought from HMRC to ensure, amongst other things, that no capital gains tax is payable by Shareholder A.
Advice will also need to be sought on stamp duty. Although this will be payable (albeit at 0.5 per cent) on the cash payable to Shareholder B, advice will be needed to establish whether stamp duty can be avoided on the share for share exchange involving Shareholder A.
Considerations for Shareholder B Here, all the shares are being transferred on day one and Shareholder B will have little, if any, assurance that they will be paid the deferred cash payment. This is why a share charge over the capital of FashionCo will often be sought by Shareholder B in this scenario.
Also, Shareholder B will consider asking for other contractual protections such as information rights in relation to FashionCo’s affairs and / or consent matters over the operation of FashionCo going forward until all the deferred cash is paid.
Documents required
As well as the Share Sale/Exchange Agreement and any security document relating to the share charge, there will also be the need for a settlement agreement which will include clauses such as:
Waiver of all rights by all the parties. Restrictive covenants from Shareholder B.
Assignment of any intellectual property rights by Shareholder B.
Agreed position on confidentiality/ announcements/references.
Structure 2 – buy back in tranches
In this structure, there are a series of share buybacks by FashionCo. There will usually be one umbrella sale agreement (the “Sale Agreement”) where there is an obligation on FashionCo to purchase and on Shareholder B to sell their shares over an agreed period of time. This is considered future, rather than deferred consideration.
The price, sale dates and number of shares in each tranche are all agreed in advance. There is no issue with deferred consideration and company law as on each agreed completion date, there will be a pre-signed stock transfer form and all cash due to be paid on that tranche of shares is fully paid. The Sale Agreement will also contain key terms dealing with events of default; grace periods and default interest. Company law sets out the procedure that must be followed to action a share buyback. Failure to comply with such procedure could render the transaction void and will constitute a statutory offence by the company and every officer in default so it’s important to get it right. We also recommend that the shareholder seeks personal tax advice before making the buyback.
Considerations for Shareholder A This will see Shareholder B continuing as a co- shareholder and usually as a director for some time until the final tranche of shares is bought
DOWNLOAD THE FOOTWEAR TODAY APP NOW SPONSORED BY
back, so there is no clean break. Shareholder A will want a clear mandate to run FashionCo to allow it to fund the future payment, they will also want a clear understanding of Shareholder B’s role (or lack thereof!) going forward.
Considerations for Shareholder B Pretty much the same as with a Newco structure. However, in addition, they will need to be careful to ensure that they don’t jeopardise any business asset disposal relief. This will typically see them wanting to remain as a director of FashionCo until the final tranche sale of shares. Thought will also need to be given to the sale percentages so that, for example, on the final sale they are not selling only two per cent of FashionCo’s capital (which is lower than the disposal percentage required to qualify for the tax relief).
Required documents
These would be very similar to Structure 1, except that there will be a series of future stock transfer forms needed with stamp duty payable on each buy back.
Practical lessons to bear in mind 1. If you are feeling frustrated in the middle of a shareholder dispute, the other side is also likely to be in the same position. 2. It is often said, but usually true, that a sensible deal is one where both sides feel they have lost as they need to make material concessions to bridge the gap (usually on the valuation of the shares). 3. With some creative structural thinking, it is often possible to bring disparate positions closer together by the use of deferred payment; security; tax allowances etc. 4. Avoid litigation if at all possible – it is costly and very stressful!
Saskia Musacchio-Adorisio is an Associate, Sarah Carlton is a Senior Associate, and Paul Taylor is a Partner in Fox Williams’ Corporate Department (
www.fashionlaw.
co.uk;
www.foxwiliams.com).
FEBRUARY 2024 • FOOTWEAR TODAY • 61
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 |
Page 61 |
Page 62 |
Page 63 |
Page 64
