Financial Data
Updated 27 Sep 2020

Want to exit the company? Here’s your shareholder exit strategy

Often when the personal circumstances of the owners or shareholders of a company change drastically, the arrangement(s) in relation to the ownership running of the business/company need to change as well.

Nicolene Schoeman-Louw, Entrepreneur, 10 December 2014  Share  0 comments  Print

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Often when the personal circumstances of the owners or shareholders of a company change drastically, the arrangement(s) in relation to the ownership running of the business/company need to change as well. This in the best interests of the company’s continuity.

In well drafted shareholders agreements (in instances of 2 shareholders or more) a provision always regulates exit from the company by way of voluntary offer.

This may be invoked or triggered by any circumstance facing the shareholder generally, including a changed desire to continue holding shares. Conversely, the mere fact circumstances have changed may result in a deemed offer of sale, such as long term illness or permanent disability.  In either case, the remaining shareholders or the company buys the affected shareholder out by purchasing his/ her shares from him/her.

There are a number of tax implications resulting from these transactions, which must be considered by companies and shareholders alike to ensure their ability (in terms of having the cash) to buy out.

In many instances depending on the reasons for the sale of the shares (illness or disability or death are common reasons), these provisions are also supported by an appropriate buy and sell agreement.

Buy out of a sole shareholder:

In companies owned and managed by a sole shareholder, when something happens to this person or he/she is unable to continue with the business, often no succession planning has been put in place.

Practically this means that the business is sold off on death of the shareholder or is so seriously diminished immediately before this actually occurs (because all the goodwill of the business was actually enshrined in the person themselves) that the business to be sold has little or no value other than the assets it holds.

One of the key ways to avoid the value being diminished is to ensure that the relevant business overhead expenditure cover, contingent liability insurance to cover bank overdrafts or sureties are in place.

Buy out by a fellow shareholder:

Similar to the case of the single shareholder and the recommended provisions for facilitating a healthy buy out (in that context) and future in that instance, regardless of the manner in which buy out is funded (by way of cash or insurance policy), a buy out transaction by a fellow shareholder will have certain tax consequences. In all instances a capital gains consequence for the seller.

In addition where any dividends are declared just prior to or with the sale, dividends tax (paid by the company).

Where the sale is funded by way of insurance policy, there may be additional estate duty consequences depending on the presence of certain factors or the way on which the policy was structured.

Buy out by way of share buy back:

In this instance the company acquires its own shares. There are additional requirements to be met, in terms of the Companies Act of 2008. In addition here too there will be similar tax consequences, particularly for the seller of the shares.

In respect of the capital gains consequences, there will be a deduction in respect of a calculation considering the seller’s contribution to the company’s tax capital and the balance taxed in the shareholders and as a dividend.

Before the buy back occurs the directors of the company must ensure the compliance with sections 46 (and 48) of the Companies Act, which determine that the solvency and liquidity test is to be applied.

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Nicolene Schoeman-Louw, Entrepreneur

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