When friends, family or
colleagues decide to set up in business together, they might think
it’s a case of til retirement do us part, but it’s not just reaching
for the pension book that can spell the end of a commercial
partnership. Many businesses fail long before the partners reach the
age of 60, yet few new start-ups even consider putting in place
procedures to deal with the dissolution, or change of their business
if things should go wrong. Here, John McBride, location director of Vantis McBrides looks at some of the routes to resolving failing
business partnerships.
Routes to resolution
There are a number of options open to partnerships and businesses
that no longer wish to continue in their present state. A lot
depends on how the entity has been set up in the first place and the
severity of the split. Key to this is making sure there is a clearly
defined agreement in place, via the articles of association and a
shareholders‚ or partnership agreement, to tackle every conceivable
eventuality so that an amicable and financially efficient solution
can be reached.
So what sort of steps can be taken in the given circumstances of
dispute?
Selling up
Putting the business up for sale frees the dissenting parties to go
their own way and should realise true value. It is generally a last
resort, especially as a purchaser may require the ongoing services
of the participants. The equity share invested in the company will
usually influence the proportion of the share of the sale price they
receive. Restrictive covenants may come into play, which prevent any
of the shareholders/board members from acting contrary to the
interests of the new owners.
Deciding to demerger
Demerger involves partitioning the company so that each shareholder
takes over a part of the business. There are two routes to demerger:
statutory and non-statutory. For a statutory demerger, Inland
Revenue clearance can be requested, under ICTA 1988 S213, which
allows assets to be divided and inter-company loans written off with
favourable tax treatment, allowing a smooth transition to running a
business as two or more distinct entities.
A non-statutory demerger, under the Insolvency Act 1986 S110, does
not require court approval and allows business assets to be
distributed to new companies which can then be sold, whilst the
original company is wound up.
Management buy-out (MBO)
If some of the management team within the company decide to purchase
the company and carry on trading, they will need to raise sufficient
finance and create a new holding company to buy-out the
selling/dissenting member. Venture capitalists may be sought to
invest in the new company. Almost invariably the financial
assistance in an MBO will be dealt with under what are known as the
whitewash procedures of the Companies Act. One advantage of an MBO
is that it allows the dissenting parties to leave the company,
however, it does also mean that the full value of the company may
not be realised, because a discount is generally allowed in dealing
with the previously employed management team.
Company purchase of own shares
This is an often overlooked method of resolution. In a number of
instances funds are not available to individuals for the purpose of
acquiring equity from a dissenting shareholder. Provided that the
company has sufficient distributable reserves and the cashflow to
support the payment, there is a mechanism whereby advanced clearance
may be obtained from the revenue to allow the company to purchase
its own share capital leaving the desired shareholder position after
the event.
Arbitration/alternative dispute resolution
Arbitration demands that a third party can reach a decision
regarding the fate of the firm and tends therefore to be the
recourse of organisations that are embroiled in deep-routed
disagreements, to the extent that they can no longer communicate
effectively.
Once the terms of the arbitration are agreed and entered into the
parties will be allowed to make representations as to their case and
these will assist the appointed arbitrator in reaching a decision.
All parties will be bound by the decision made by the arbitrator and
generally the decision will be coupled with a recommendation as to
how the overall costs will be split between
the parties.
Liquidation
While liquidation protects the base value of the company, it
generally makes no realisation of the value of goodwill, so the
overall value of the business assets can be diminished. There is
also an additional cost involved, for the professional insolvency
expert to deal with the process, which can also take quite a long
time to complete, given the formalities involved. On the positive
side however, there can be business asset taper relief for capital
gains tax purposes if the procedure is conducted speedily.
Conclusion
While no entrepreneur wants to contemplate the possible breakdown of
a friendship or partnership leading to their business needing to be
dissolved, it is clearly prudent to make provision for such
eventualities. The best advice is to ensure clear agreements are in
place at the time that the business venture is established to ensure
that all parties receive what they feel is a fair share in the event
of a boardroom bust-up and that the company itself is given every
chance of survival, or that it is dissolved in the fairest and most
tax-efficient way possible.
******************************************************
John
McBride,
location director, Vantis,
www.vantisplc.com
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