The shares transactions involve the shares in the company being transferred from the seller to the purchaser.
Any shares transaction of private companies involves finding out the price of it. In some cases, the applicable formula is specified in the shareholder agreement. In other cases, the entire company is sold and this sets the price per share. However, many share transactions require temporary negotiations. It is very likely that the share price negotiation will arise debate about:
- If an organization plans to buy back the shares owned by one shareholder and then cancel them to increase the participation of other shareholders;
- If the company plans to reorganize and exchange shares of one company for shares of another company;
- When a shareholder leaves the company and wants to sell the shares or is forced to sell them upon leaving the company in accordance with the articles of association.
Share transactions agreement
A detailed share transaction agreement should be prepared which should clearly set out the terms and conditions for the sale of shares and cover the following points:
- The number of shares to be sold or purchased;
- The purchase price of the shares to be sold or purchased;
- When and where the sale of shares will be completed;
- A succession of the company name;
- What will happen to employees? If they will remain in the company but may be provided for the dismissal of certain employees or for certain benefits if control over the company changes;
- Tax issues or consequences;
- Guarantees provided by the seller of the shares to ensure that the buyer is not stuck with outstanding obligations;
- The seller's obligation to provide the buyer, upon completion of the transaction, with documents such as a signed share transfer form listing the shares to be transferred and the payment or purchase price received;
- Where applicable, the lease must be disclosed in the contract and in the assignment terms;
- How the purchase price will be paid - by a one-time payment at the end or overtime.
In accordance with the constitution of the company and the shareholder agreement, a meeting of the board of directors of the company may be required.
According to the company's constitution, other shareholders may be granted the right to purchase shares that a shareholder plans to transfer, or a first refusal right (this means that shares can not be transferred to a third party before it has been offered to existing shareholders). In this case, as a rule, the shareholders must give their written agreement or make a special/unwanted decision to a third party and show their first refusal right.
Approaches to a share transaction
There are three main types of valuation of a company, which reflect the share price of a private company:
- Dividend basis. This is assumed for equity participation, where the main advantage of the share is the right to receive dividends.
- Earnings basis. Often used when selling a company. It considers the potential future profits of the company after taxes, interest, and dividends have been paid.
- Asset basis. Used either on liquidation of the company or when the value of the company's assets exceeds the capitalised value of dividends and profits.
Many different considerations are expressed in terms of evaluation. Common themes will be discussed, such as:
- size of participation;
- strategic value;
- future profit potential;
- number of shareholders;
- the authority to have a director on the board;
- right to vote;
- the right to veto certain decisions;
Buying and selling company shares, whether small or large, can be a complicated process. To ensure that the transfer of company shares is handled properly and that you are adequately protected, you should talk to experienced business and commercial lawyers.
Our team understands that the success of share transactions often depends on the quality and speed of the negotiations, preparation of documents and their execution by the parties. Our team of experienced lawyers will quickly assess and resolve these issues to ensure that the transaction is completed quickly and efficiently.
GM Tax Consultancy team of lawyers and consultants can recommend suitable advisers who will ensure that each transaction is completed in a tax-effective and timely way.