The minority shareholder trap

    If you own (say) 25% of the shares in a private company which is worth (say) £1 million, what do you think will happen to those shares on your death? Michael Cutler, senior partner and head of private client work at Colemans Solicitors LLP, has the answer.

    You probably expect that they will go to your widow (not a sexist assumption, it just simplifies the language here), who will be able to sell them to someone for £250,000.

    It doesn’t work like that.

    The typical company ‘mem and arts’ will say that she must first offer them to your fellow shareholders, at a price to be set by the company accountant.

    They don’t have to buy them. They don’t need them to run the company and, if they take money out of the company in directors’ remuneration rather than through dividends, they could even cut the income stream to the shares.

    Even if they do want to do the decent thing by your widow, where are they going to find £250,000?

    Under the typical ‘mem and arts’, if the other shareholders do not take up your widow’s offer, she is then free to sell the shares on the open market.

    But there is no market for a minority shareholding in a private company.  Your shares are worthless.

    Perhaps one of the other shareholders will take pity on your widow and offer her a few thousand pounds to take them off her hands. Not at all what you (or, probably, she) expected.

    The only way to guarantee that your widow can sell your minority shareholding and get full value for it, is for you and the other shareholders to enter into something called a cross-option agreement.

    If the job is done properly, your widow will get her £250,000 after your death with no fuss or stress, and it will be insulated from 40% inheritance tax when she dies, and for at least another generation after that.

    If you want to know more about this, ask your accountant, your financial adviser or your solicitor. But, if they have not already told you about this, you might be better off asking Michael Cutler, who wrote this article.

     

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    Michael Cutler
    Michael Cutler
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