6 Rules for the Sale of Equity / Shares
In the UK, the payment for equity (shares) in a private company needs to be strictly controlled to ensure that it compliant with company law. It is one of the key areas that come into play when selling a company and can be a contentious area if historic share transactions have not been followed according to company law and / or share purchase agreements.
There are various steps that are required to be followed when shares in company are sold (or have been sold), and are advice is always to engage a competent commercial lawyer to handle such transactions.
Steps that need to have been followed include:
1. Shareholder Approval
The issuance of new shares or the transfer of existing shares must be approved by the shareholders of the company. This is typically done through a resolution passed at a general meeting of the shareholders. Ensuring that the proper procedures are followed, and the shareholders have the necessary information to make an informed decision can be a challenge.
2. Valuation of Shares
The valuation of shares is an important aspect of ensuring that the payment for equity is fair and reasonable. The valuation of shares must be done in accordance with the relevant provisions of company law, and it must reasonably reflect the true value of the shares at the time of the transaction. Obtaining a valuation of the shares can be a complex process that requires the input of experts such as accountants and valuers.
3. Timing of Completion
Payment terms and conditions are negotiated and outlined in a legally binding agreement, such as a Share Purchase Agreement (SPA) or a Share Subscription Agreement (SSA). These agreements specify the terms of the sale, including the purchase price, payment schedule, and any other relevant conditions. The timing of payment monies needs to chime exactly as defined in the agreement– which if not carried out ‘to the letter’, can mean the transaction is deemed null and void, even if payment has been made.
4. Disclosure and Transparency
Company law requires that companies be transparent about their ownership structure and share capital. This includes disclosing any changes to the share capital, including the issuance of new shares or the transfer of existing shares. It is also important to ensure that all parties involved in the transaction have access to accurate and up-to-date information about the company and its financial position.
5. Compliance with Statutory Requirements
There are various statutory requirements that must be complied with when issuing new shares or transferring existing shares. These requirements include compliance with the Companies Act 2006 and the Articles of Association of the company. Failure to comply with these requirements can result in the transaction being deemed invalid, and the parties involved may face legal consequences.
6. Potential for Shareholder Disputes
When shares are issued or transferred, there is a risk of shareholder disputes arising. Shareholders may dispute the valuation of the shares, the terms of the transaction, or the disclosure made by the company. Resolving these disputes can be time-consuming and costly and may involve legal action.
In conclusion, ensuring payment for equity in a private company is strictly controlled according to UK company law can be a complex and challenging process. It requires compliance with various statutory requirements, transparency, and accurate valuation of shares, and shareholder approval. Our experience suggests that if any company owner thinking of selling, who has sold (or bought) equity in a company that is being lined up for sale, should take specialist legal advice to review all documentation to ensure the transaction(s) are deemed valid. Much better to obtain a ‘clean bill of health’ prior to exit, rather than hit a major roadblock mid-sale.
To discuss any of the six steps for the sale of equity / shares or any other matter pertaining to the sale of a company, contact us now to discuss in confidence.Tags: company law, company sale, Completion, Compliance, Disclosure, Equity, M&A, private company, Rules, sale, Shareholder Approval, Shareholder Disputes, Shares, Statutory Requirements, Valuation