The Case of the Missing Shareholder

Bracket and Slab was a successful building company. John Slab the principal shareholder had taken over the business 15 years previously when old Tom Bracket had wanted to retire. John allocated some shares to his wife, Moira, who worked in the accounts department and eventually ran it and became financial director. Early on around the difficulties of 2008, John had needed some money urgently so gave 20% of the shares to Colin, Tom Bracket’s old site manager in return for £20,000 from Colin. Unfortunately this relationship did not work out: Colin became disenchanted with the new regime and emigrated to Australia. Because John was so frustrated he only paid him back £10,000 of the money he had invested. They parted company with bad feeling.

Due to John’s incredible enterprise and skill and Moira’s ruthless focus on cash and solvency Bracket and Slab became hugely successful. One day John was approached by Happy Homes plc a listed housebuilding company which offered John £10m for the whole lot. Finally after all the years of hard work wealth and retirement beckoned.

The details of the deal were swiftly agreed and due diligence commenced. As part of the due diligence John was asked to produce something called “the company books”. That’s easy he said, just ask Moira, she has all that under control. No they replied, not the financial books – the members register and the other register “What’s that?” said John. After some discussion it became clear that the accountants had some dusty share registers but they were not up to date. One thing was clear though: Colin had a page which proudly displayed his 20% shareholding. This was also consistent with what had been filed at Companies House over the years. John was baffled – Colin had given the shares back to him when he went to Australia – hadn’t he? After a search he found a letter from Tom thanking him for the money and agreeing that John could have the shares back. The Buyer’s solicitors however were extremely unhappy with the situation and advised the Buyer not to proceed. How could their client spend £10m on a company when the Seller couldn’t prove that he owned all the shares? Disaster loomed.

This little story sounds fanciful, but it isn’t. “Company books” are very boring, nobody gets excited about them. However under the Companies Act 2006 a company must keep 5 registers as follows:

1. A register of members;
2. A register of directors;
3. A register of directors’ residential addresses;
4. A register of company secretaries; and
5. A PSC register.

“PSC” means “people with significant control”. This was introduced by the government in 2015 to help people searching at Companies House to identify who actually controls a company rather than merely the numbers of share in issue.

The rule about who is a shareholder is both simple and strict: a person is a member of a company when their name is entered into the register of members having agreed to become a member (section 112(2) of the Companies Act). The converse of course is likely to be true: you are still a member if your name is remains in the register of members.

Colin’s letter simply wasn’t enough: in order to pass on ownership of a share in a company an instrument of transfer is needed. Solicitors refer to a stock transfer form, the usual way of passing ownership.

Don't forget HMRC

There is more, HMG wants a slice! Once a stock transfer form has been signed it needs to be stamped by HMRC if value has been given or at least a certificate provided if it is a gift or less than £1,000 was paid. It is illegal, contrary to the Stamp Act 1891, to register a share in a company which hasn’t been properly stamped.

So many things had gone wrong with Colin. He hadn’t signed a stock transfer form, if he had it had been lost, no one could say if the Stamp Act had been complied with and for some reason the annual returns to Companies House repeated the lie that Colin was still a member: but maybe it wasn’t a lie.

So how did the story end?

There was a delay of some months whilst John tried to track down Colin in Australia. When Colin was asked to sign a stock transfer form he asked “what’s it worth?”. At least John could give him the rest of his money, oh and plus interest. Once this was sorted and Colin had signed a stock transfer form John was made to sign a detailed indemnity in the share purchase agreement. As well as being embarrassing this made him nervous in case Colin popped up again.

In a surprising number of owner-managed companies that we see when acting on the buy side there are problems with the company books (the registers) and some of them are really serious and potentially jeopardise the whole deal. It is worth having a look at these registers early on in the process so there is time to deal with any issues.