How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Law Educator, Esq. Your Own Question
Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 115461
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
10285032
Type Your Business Law Question Here...
Law Educator, Esq. is online now
A new question is answered every 9 seconds

I wonder if you could help me with a Delaware company share

Customer Question

Hi
I wonder if you could help me with a Delaware company share issue
We are going through a structure change and the new shareholder has agreed to get his share-holding reduced to 70%
Currently he will be buying 79.6% from the outgoing shareholder without the money going through the company books
The other shareholders have also agreed to reduce their shareholding at different percentage.
There is no monetary or other consideration involved
Could you advice ?
Submitted: 1 year ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.
In order to have a valid contract, there must be an agreement as to object of the contract and consideration. So if there is no money or consideration involved, what is his consideration for agreeing to reduce his shares that he is holding? Also, what is he going to be doing with the 9.6% he is going to get rid of, is the company going to buy them back?
Customer: replied 1 year ago.
That is the part we are not sure of
The new shareholder wants to reduce his shareholding to 70% so the management ends up owning 30%
He is open to any agreement to do this
Can the company buy back his shares are a nominal amount say $1 ?
He is buying the 79.6% for around 150k so his 9.6% is 18K. Can the company buy it for $1 and cancel it
The other shareholders also accept a cut to reduce their percentages
So shareholder a is taking a cut of 60% of his holding
Shareholder b is taking a cut of 56%
shareholder c is taking a cut of 3%
shareholder d is taking a cut of 4%
The consideration is that shareholder c & d are most active and to give them more ownership of the company without issuing new shares
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your reply.
Well, without any valid consideration, his alleged agreement is not enforceable. So you are going to need to get your company attorney involved here to provide a written share sale agreement for each of the shareholders who are giving up their shares. The valid consideration can be to compensate C&D for their management and operations of the company, that would be sufficient consideration. So you can write your shareholder transfer agreement to indicate that each shareholder agrees to surrender the percentage of shares you mentioned above to be divided between C & D in consideration for their work and efforts in running the company, which is compensation to them and valid consideration for the other shareholders to give up their shares.
Customer: replied 1 year ago.
OK however I think C & D will then be charged tax because they declared they got a consideration for work and effortAnother alternative we were thinking is to ask the new shareholder to subscribe to new shares in the company and then use the proceeds to pay the old shareholder. Hence the new shareholder say subscribes to 5.2m shares and we use the same proceeds to pay off 13.2m of existing shareholders. This changes the percentages without declaring consideration of C & DAny other way you can think of that will not highlight the work and efforts put by C & DIs there anyway a consideration can be low say 1.8k instead of 18K for instance that will help us avoid the tax consequencesC&D will ofcourse pay taxes when they sell as the cost of it will be reduced from the selling price. But at the moment its not realised
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your reply.
No, C & D can be taxed for receiving compensation, but shares generally have no value other than par value and they are taxed when they receive dividends or sell the shares.
Payments to the old shareholders are taxable events too, since it is a sale of shares, so if you are worried about taxable events this would be a taxable event as well.
Quite honestly, giving them more shares as investors in consideration for their roles in the company is really the most effective way to do this.
Customer: replied 1 year ago.
I think its incorrect
Shares at par value say of a listed company has more value than the par value. If allotted without a consideration the employee has to pay a tax
The same rule applies to unlisted company as well
In tax rules there is no distinction between listed and unlisted
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your reply.
If they receive them as "compensation" or pay, yes, you are right. It is taxable if received in lieu of cash payment. However, they can receive shares as statutory options, which require an incentive plan document that clearly outlines how many options are to be given to which employees, and those employees must exercise their options within 10 years of receiving them.
If you do not want to go through that where the company holds the shares and give them the options, then you would need to have them purchase the shares for actual money to receive them in any manner without a tax consequence. The board can also set valuation of the stock to fair market value and can lower the prices somewhat to reduce their tax liability.
Customer: replied 1 year ago.
OK so we cannot say that A & B have agreed to reduce their shares in consideration of C & D putting in more work as its taxable as they are getting something for the work they are/will be doing instead of cash although its not more shares but a reduction from A & B. Does that qualify as a compensation even though there is a reduction of shares of A & B and no actual shares are given to C & D
Expert:  Law Educator, Esq. replied 1 year ago.
Thank you for your reply.
Correct, you cannot say they are doing it to compensate C &D for work, but you can say they are selling them back to the company and the company has a statutory incentive plan for C &D OR C&D can buy the shares from the other members at some reduced share price as well (which then would not be income).
Customer: replied 1 year ago.
Basically A & B wants to give free shares to C & D without incurring taxes until C & D sell their shares
When C & D sell their shares all gain is taxable as they did not pay anythingHence can C buy from A & B at zero or nominal value
In the books of C as he has got a discount - when does the chargeable event for tax happens.If the company were to issue at shares at zero cost, C has to pay tax on fair value less acquisition cost. What if he buys it from A at zero cost. I assume he got some value for zero money so he has to pay tax on it
Expert:  Law Educator, Esq. replied 1 year ago.

Thank you for your reply.

They could do an act of donation, a gift, to the members of shares, but a gift of stock also creates a taxable event. It is not likely that any way you do this other than a statutory incentive option plan would avoid the tax consequences. You could not buy it at $0 if that is not the value of the shares. They would have to be taxed at least at the value of the shares or have to buy the shares from the individuals or the company or you have to have an incentive plan.

Related Business Law Questions