Corporate mistakes your business may have made

...and what you should do about them.

Corporate requirements can be fiddly and, sometimes, unintuitive. It is easy for businesses to trip up on corporate issues. In this series we look at 10 of the most common corporate mistakes companies make, and, more importantly, what they should do about them.

When does it happen?

Normally when an employee shareholder leaves a business and it is agreed that the company (rather than the other shareholders) will buy the shares. The business seeks to “cancel” the shares, but falls foul of the strict rules on buybacks. We very often see a botched buyback where tight budgets meant that good quality legal and accounting advice wasn’t taken from start to finish of the process or the buyback of shares is wrapped up in a settlement agreement when someone leaves and the employment law aspects are all covered but the corporate law aspects are ignored or forgotten.

What mistakes can be made? 

Many!…Buybacks are very heavily regulated and hard to get right without comprehensive advice. Mistakes include:

  • Not enough “distributable reserves” to allow a business to buy its own shares out of income
  • Correct documentation not being in place (given that it is conceptually a simple transaction there is an unexpectedly long list of  documents needed: buyback agreement, shareholders’ resolution, board minutes etc. etc. etc.)
  • The buyback being on terms which aren’t permitted by company law e.g. a company cannot agree to buyback shares and pay for them later (though there is a way you can achieve the same commercial result – see this brilliant article here).
  • Stamp duty not being paid and/or Companies House forms not being filed.

Why does it matter? 

If mistakes are made, then the shares may still exist. Even if the buyback was made a long time ago… The shareholder may come knocking for their share of dividends or the sale proceeds on a future sale.

If you ever wished to sell the business, a dodgy buyback will almost certainly come out during pre-sale due diligence which will be a red flag to a prospective buyer.

What can you do about it? 

This really depends on what went wrong (sorry, not the most helpful!). It could be anything from absolutely nothing (as the risk is tolerable), to obtaining new paperwork from the departed shareholder or even going to court. If you’re worried about a historic buyback, we would recommending taking advice as soon as possible because:

  • If you need anything from the departed shareholder it will be much easier (and cheaper!) to get their signature on documents, if your business has not grown in value.
  • If you do need to go to court, then the process can be completed in good time ahead of any sale or corporate re-organisation which may happen in the future.
  • Any fines/penalties for any unpaid stamp duty will be reduced.
  • The mistake won’t get compounded, if you restructure your company in the future based on an incorrect understanding of your shares.

Interested in reading what other mistakes you business may have made? You can read the full article with #1 – 10 here.