Share Sales: Are your constitutional records in order?
During the early stages of a company acquisition, the buyer will conduct due diligence and the key consideration before anything else is whether the seller has title to the shares that they are selling.
When assisting sellers during the due diligence process, one of the most common issues that we come across is that share filings at Companies House and the company’s statutory registers have not been properly maintained. The inconsistencies make it difficult for a buyer to establish that the seller has full title to the shares that they are selling and can also leave the company with potential sanctions for the errors, such as fines. On discovering errors a buyer has four main options:
- withdraw their offer;
- use the uncertainty to renegotiate the price;
- ask for an indemnity requiring the seller to pay the buyer should the lack of proper records cause the buyer any future loss; or
- require the seller to rectify matters prior to completion.
To assist you with identifying the records that should have been kept, we consider below the statutory books and Companies House records relating to shares.
Company Books – Register of Members
A company is legally required to keep an up to date register of members.
The register provides prima facie evidence of who the members are and the shares that are held. For a buyer, it also provides a record of the shares in issue and how title has passed throughout the history of the company. Although not mandatory, it is good practice for a company to also keep a register of transfers which assists a buyer when investigating title to the shares.
Failure to maintain company books means that an offence is committed by the company and every officer of it, and that either could be liable on summary conviction to a fine. A potential buyer will not want to inherit this risk.
Companies House - Share Records
The law also requires a company to maintain accurate records at Companies House.
On incorporation, a company is set up with a specified number and class of shares. When amending the company’s share structure, the shareholders must pass a special resolution and arrange to file the appropriate forms with Companies House recording the amendments. Alterations to a company’s share structure can include:
- a change in the company’s share capital either by issuing more shares or changing the value of the shares held (for example changing 100 £1.00 shares in to 1,000 £0.10 shares);
- a change in how shares are designated (for example changing 100 ordinary shares in to 50 A ordinary and 50 B ordinary shares);
- a change to the denomination (changing the currency of your shares);
- cancellation of any shares.
Contrary to general belief, it is not sufficient to simply update your share record in the company’s annual confirmation statement. Specific forms need to be filed with the Registrar of Companies which provide sufficient details of any changes. There are also set time scales for the above changes to be notified to Companies House. If more shares are issued, you must inform Companies House within one month. Generally, any other changes in structure must be reported within 21 days.
As with a failure to maintain company books, a failure to notify Companies House of any of the above changes within the specified timescale could also result in penalties.
Resolution
A company’s share capital and a seller’s title to shares is the first area of scrutiny during a share sale. Inconsistent or non-existent filings can cause a buyer concerns during the due diligence stages and also leave the company with potential criminal liability and fines.
If when reviewing the company books and Companies House records you notice that there are inconsistencies or are unsure that the records are correct, we would recommend that you seek advice to assist you before entering into negotiations to sell the company. The Corporate team at RWK Goodman will be happy to assist you.