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Ask the experts: Shareholding

Sonio Singh, a corporate law specialist with Hub partner Davis Blank Furniss, answers questions about Shareholder Agreements and the gifting of shares.

Q: I have recently set up a company with a number of business partners and my accountant has recommended we use a Shareholders Agreement. What are the benefits of this?

A: A Shareholders Agreement sets out the rights and obligations of the Shareholders of a company and typically governs areas such as management and structure, its funding process and administration matters. I would strongly recommend that you enter into a Shareholders Agreement for all of the following reasons:

  • The internal management of the company can be regulated and levels of shareholder approval for fundamental business decisions of the company can be clearly defined
  • Definitive procedures can be set out in the event of a disagreement or deadlock between the Shareholders
  • Restrictions can be put on Shareholders with regard to the transfer of shares. Accordingly, the other Shareholders will have comfort as to the identity of those persons with whom they are dealing
  • Agreed exit policies can be inserted where Shareholders leave the company. This allows the company to satisfactorily sever ties with any problem Shareholders who were previously employees/directors. In addition, defined succession policies can be put in place on the death or bankruptcy of a Shareholder
  • The goodwill of the company can be preserved by placing restrictive covenants on Shareholders

Q: I would like to gift my minor children some shares from my business. Is this possible?

A: A person under 18 can hold shares in a company in his or her own name unless the constitution of the company specifically prevents this. However, this can cause problems particularly if the child is a baby (and so can’t sign required documents) or if the shares need to be sold before the child reaches 18 years old. Prior to reaching 18 (and for a reasonable time afterwards) the child can reverse any sale made when he or she was underage or even renounce the original gift.

A parent or guardian has no special powers to sell shares or sign documents on the child’s behalf. It would be far better to have the shares held for the child by a nominee. As with any gift, if the donor goes bankrupt later, there is a risk of the transfer being set aside by the courts. It also won’t work to reduce the family’s income tax liability, as any income over the first £100 received by a child on assets given by a parent will be taxed as the income of that parent. If the shares have (or in the future might have) significant value then proper tax advice, including on whether to set up a formal trust, should always be obtained first.

More information about the services provided by Davis Blank Furniss can be found on their Hub partner page

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