We are a small family company which has issued shares to the children of the main shareholder, who are all under 18. We now wish to sell the company to a buyer. What can we do?
This is a really tricky one. The problem is a child’s capacity to be bound by a legal contract.
1. Can the child surrender shares back to the company? Can the shares simply be cancelled? How about if the child declared that they surrendered their shares in the company?
If a child becomes a shareholder in a company, he is generally allowed to surrender those shares either during his childhood or within a reasonable period after turning 18. There is case law to support this. However, the model articles of a company are silent on what happens to those shares after they have been surrendered. The shares would not automatically cease to exist as a result of the surrender. In order to cancel them the company would need to utilise the reduction of capital procedure, but that requires a court order.
2. Can the child simply sign the sale contract?
In terms of the child signing the sale contract for the sale of shares, such a contract would be voidable – i.e. it would not be binding on the child and therefore a cautious buyer will not feel safe that a child’s signature on the sale contract would secure the transfer of those shares. There is a risk to the buyer that the transaction could unravel.
3. Could the company buy back the shares?
This still requires a buy back contract which the child would have to sign and runs into the same problems as with the child signing the sale contract. It will not be binding on the child.
4. How about if the parents sign on behalf of the child?
There does not appear to be any general authority under English contract law which allows a parent to sign an agreement on behalf of their child. It is also doubtful that a child can appoint an attorney to act on his behalf for the same reasons that a child cannot be bound by a contract and so using a power of attorney would not get around the risk to a buyer.
Advice: the safest solution would appear to go through the reduction of capital procedure. It takes some time and is costly, because it requires a court order and a couple of public notices, but by getting an order that the child’s shares are cancelled, it provides security to a potential buyer.