Our team at Francis Wilks & Jones regularly advises clients on business funding and share sales.
How do share sales provide business funding?
A business may not wish to incur or increase its debt commitments by borrowing or entering into other financial commitments with business funding providers. Instead it may prefer to use its shares to provide the necessary funding. These shares could either be shares in another company that the business owns (that it sells to a third party) or it could be shares in itself that it issues to new or existing investors.
Types of share sales
There are two main types of share sale:
Shares in another company are an asset of the business and like any other asset, subject to any restrictions that may be contained in the shareholders’ agreement that regulates the disposal of the shares, they have a value and are freely transferable. By disposing of shares that the business has in another company, whether it is a wholly owned subsidiary or only a partial shareholding, will provide the business with an additional source of funding.
A private company can be incorporated with only one shareholder holding a single share, typically representing a £1 investment in the company. It is possible, however, either to issue more shares at start-up or to have a share issue at some later stage both of which would provide the business with additional capital.
Sale of existing shares
The shares in a private company can be valued by a specialist agent, who may also be able to find a buyer for you, the company’s accountant or the sale price may be determined by provisions of the shareholders’ agreement.
For many small businesses, it is common for the directors to also be the shareholders and these shares are a personal asset. There is no legal requirement for directors to be shareholders, although the shareholders’ agreement may link the right to be or appoint a director to shareholding. The shareholders’ agreement will often also contain detailed provisions setting out the mechanism for any shareholder to follow if he wishes to sell his shares, such as
- when, for how much and who to for example, do the other shareholders have prior rights to buy the shares?
- can they direct or block who can become a shareholder?
A company may hold shares in another company, either as part of a group structure or just as an investment. One way to provide funding for the business would be to sell those shares to another company or person. A corporate shareholder may be a party to a shareholders’ agreement if it only holds some of the shares, and therefore would be subject to the same terms as any individual shareholder.
The sale of the entire shareholding in a subsidiary by a single corporate shareholder can be a complex and lengthy transaction involving a full disclosure to the buyer of every aspect of the business operated by the company but would result in an injection of capital for the selling business. A disposal of shares in another company may have a positive impact on the business’s own funding position simply by removing a financial burden from it as it would no longer have to support another business.
Sale of new shares
A company’s ability to create and issue new shares to its existing shareholders or to new parties willing to invest in the business is governed by the Companies Act 2006 and the terms of its constitution, but this process can be a useful source of additional funding for the business.
Funding the purchase of existing shares
A company wishing to acquire some or all of the existing shares of a company may be able to fund this purchase from its own resources, including director or shareholder loans, or it may need to use external business funding (such as a secured loan or asset based lending facility) to raise the necessary capital.
Francis Wilks & Jones’ specialist finance lawyers can advise and support the directors and shareholders of a company that are seeking to purchase the shares in another company using funds from a finance provider. Our expertise will include reviewing and negotiating the terms of the finance agreement and any related security documents as well as handling the preparation and delivery of all conditions precedent and liaising with the lawyers advising you on the share purchase.