Maintaining a steady ownership base is frequently viewed as a significant element contributing to a company’s success. Nevertheless, it is highly probable that at some point, a company will face alterations in its ownership composition.
During such instances, it could be an opportune moment for entrepreneurs to explore new avenues. Additionally, external circumstances can trigger changes in the ownership composition. For example, differing perspectives, disputes, and strains might ultimately result in an exit.
In SMEs and family businesses, the most obvious solution in an exit is to sell the shares to one or more of the existing shareholders.
A sale to a third party is a second option when the remaining shareholders are not willing to increase their stake.
However, if a minority stake is involved, finding an interested third potential buyer is not obvious. Moreover, in family businesses there is often a desire not to lose the familial identity and to keep the ownership entirely within the family.
To accommodate such situations, a mechanism can be provided in which it will ultimately be the company (read: all remaining shareholders) that acquires the shares through a buyback of its own shares.
In a previous article Deminor already highlighted the legal and tax regulations to which the technique of purchasing own shares is subject.
New legislation in fact facilitated the conditions for purchasing own shares in 2019, with a key change being the removal of the maximum limit (previously maximum was 20 % of the total number of shares). Also, the special majority required within the general meeting to approve such repurchases was reduced from 80 % to 75 % of the votes. Moreover, there is no longer an obligation to dispose of the shares within two years.
Besides the corporate law aspects, a purchase of own shares also has special consequences from a tax point of view. In theory, when a company repurchases its own shares, a dividend is included in the corporate tax base. This dividend is equal to the difference between the repurchase price and the paid-up capital represented by the acquired shares. Depending on what happens to the shares after the repurchase, 30 % withholding tax will be levied on this amount.
The purchase of own shares as an exit mechanism is not suitable for every company. In practice, the mechanism can only work if the company has the necessary liquidity or financing resources so that it can buy back its shares without restricting its growth and further plans.
If the company has insufficient liquidity, it can arrange a loan to buy back its own shares. Delayed payments can also be provided, which also indirectly provides the exiting shareholder with a financing solution.
In the context of purchasing own shares as an exit mechanism, the application of a limited illiquidity discount or share price discount is also regularly provided for.
After repurchasing its own shares, the company can decide to hold, resell, or destroy the shares. As already mentioned, the latter two choices do have special tax consequences.
If the shares are destroyed, the company’s total number of shares decreases. As a result, profits have to be divided among fewer shares, increasing the value per share. So it can also be a good deal for the remaining shareholders.
If several shareholders choose to sell their shares and the predetermined threshold is exceeded, they may only sell their interests up to their respective pro rata share of the threshold.
Also be sure to read our e-book: Exit of a (minority)shareholder, an exit under the best conditions.
Would you like more information on setting up an exit mechanism? Feel free to contact Lien Verhasselt.