5 things to consider when introducing shareholders


From time to time, situations may arise when your family business needs to bring in new shareholders. This may be for business development or succession planning reasons or to strengthen governance. Whatever the reason, there are a number of important matters to consider, five of which are touched on in this short article. However, before bringing in new shareholders it always advisable to seek advice on your plans from an accounting firm with family business expertise.

1. Ways to introduce shareholders

One of the first things that you will need to decide on is how to bring the new shareholders into your family business. There are a number of different ways to do this depending on the circumstances. Common examples include:

  • Transferring shares to a family member or third party: This is often used when passing a family business on to the next generation. Planning the transfer correctly is very important as succession impacts not just the exiting shareholder and their successor but also other shareholders and family members.

  • Allocating shares to an investor: Another way to introduce shareholders is by allotment of shares. This is usually done to raise finance, bring in new investors or convert loans to share capital. Again, careful planning is important and there may be tax implications for your existing and new shareholders.

  • Introducing an Approved Profit Sharing Scheme (APSS): A Revenue Approved Profit Sharing Scheme is a tax-efficient way to set aside shares for your employees. Under an approved scheme an employee may be allocated shares up to a maximum annual limit. An Employee Share Ownership Trust (ESOT) is a similar mechanism for placing shares in the hands of employees. Usually, ESOTs are established in tandem with an APSS.

  • Share for Share Exchange: This is where a family business issues new shares in exchange for shares in another company. Family businesses sometimes use this mechanism to create a group for company law and tax purposes.

2. Shareholders’ Agreement

A Shareholders’ Agreement is an essential tool for managing shareholder relationships. Although shareholders are not in charge of the day to day running of your family business, they do have a say over business goals and some business decisions require shareholder approval. The Shareholders’ Agreement is a formal document which governs matters relating to the ownership and control of the business as well as dividend policy, rules for the transfer of shares and the procedure for resolving disputes. To avoid pitfalls when drawing up the agreement, professional advice should always be obtained.

3. Timing

Getting the timing wrong can be an expensive mistake as you may miss out tax planning opportunities. Timing is also critically important if you are introducing a family member or other person as a shareholder with a view to succession. It takes time to prepare a new leader and you need to ensure that the successor you have in mind is willing to take on a leadership role. Questions to consider at the planning stage include: What initial level of involvement will they have in the management of your business? What capabilities/skills will they contribute? What development and training will they require? How will the succession impact other family members? These issues are covered in more detail in our article on Succession Planning.

4. Tax

Share transactions often have significant tax implications which can be advantageous when transactions are properly planned but equally can be very costly if a transaction is not correctly structured. On share transfers, for example, caution is needed at the planning stage as Capital Gains Tax (CGT) at a rate of 33% applies to gains made by the person transferring the shares while Capital Acquisitions Tax (CAT) at a rate of 33% applies to a person receiving shares that are free or below market value although this may be reduced if you qualify for tax relief and the transfer is correctly timed. There is also Stamp Duty (currently 1%) on share transfers. To take another example, when properly planned, a Revenue Approved Profit Sharing Scheme can be an advantageous move from a tax perspective however there should also be a sound business case to introduce the scheme.

5. Share value

For transactions involving shares in your business, you will need to know what the shares are worth. A valuation is also necessary for tax purposes when you are selling or transferring shares to another person, setting up share option schemes or when shares pass to another person by way of inheritance.

Seek advice

Introducing new shareholders is a significant step for any family business and needs to be carefully planned. As mentioned at the outset, the best way to avoid pitfalls is to seek advice at an early stage from a professional with expertise in family business consulting. This will help to ensure that you structure the transaction in a way that benefits your business while also protecting your family.

HLB Ireland provides comprehensive family business support including strategic advice, transaction support, tax and company secretarial services. For more information, please contact our family business team.


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