Raising funds to purchase shares

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Published: 25 Oct 2015

Avoid killing the goose that lays the golden eggs

The killing of the goose that laid the golden eggs in Aesop’s Fable represents an unprofitable action motivated by greed. Whilst hopefully not driven by greed, but genuine reasons or even acrimonious situations, changing circumstances in life may lead to fellow directors or shareholders parting company. 

Either way, a valuation has to be agreed for the shares to be sold by the outgoing parties and that may not necessarily be an issue. However, the stumbling block can be the amount of finance required by the continuing shareholders to pay for these shares, which can pose a real problem.

A solution to consider may be for the company to purchase those shares from the outgoing shareholders. To allow the company to purchase the shares:- 

  1. An ordinary resolution, with over a 50% voting majority, needs to be passed at a general meeting of shareholders.
  2. The company must have sufficient reserves to pay the premium over the nominal price of the shares to be redeemed.

Obviously, the company must have sufficient cash resources to buy back the shares at the agreed price as well. But it may be that the company is ‘strapped for cash’ after going through this exercise, as a result of which its trading position may be seriously affected.

This situation can be avoided.

Fresh issue of shares 

A way round this dilemma would be for the company to make a fresh issue of sufficient shares for cash at a premium to the remaining shareholders in the same proportion to their existing shareholdings.

It is agreed that the remaining shareholders need to dip into their pockets to pay for the additional shares to be issued, but it would be less than if the remaining shareholders had to purchase all the shares held by the outgoing shareholders.

Guidance must be sought from a company lawyer in relation to the legal procedures for the company to purchase of own shares.

We can recommend a company lawyer to advise on the legal procedures for the fresh share issue and  the purchase of the company’s own shares. Please call David Cane on 0845 177 0036 or email [email protected]