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As a business person, you may sometimes purchase shares from other companies. When buying company shares, you may have to purchase them from a trustee. Purchasing shares from a trust is primarily the same as purchasing shares from a non-trustee, though you may run into specific barriers due to the legal status of trusts. This article will explain the practical difficulties you may face when you purchase shares from a trust and evaluate some ways to avoid these.
Legal Overview of Trusts
A trust describes a legal relationship where trustees own legal title to a piece of property (company shares) on behalf of one or more beneficiaries.
A trustee has the legal title to the shares, which means they can sell them as if they owned them. However, they do not own the shares, so they must always act in the beneficiaries’ interest.
The beneficiaries benefit from the trust through regular dividend payments but cannot sell the shares themselves because they do not own the legal title.
Trustee Shareholders
Mom & Pop Co Ltd
Mom & Pop Co Ltd is a fictional family business. It used to be owned by its founder, Mr Marks, who has since passed away. In Mr Marks’ will, he stated he wanted to create a trust over all of his shares on behalf of his five living adult children: Rosa, Joseph, Frederic, Emma, and Leon. Mr Marks’ has appointed two younger business associates as trustees: Mr Smith and Mr Menger.
Each child is entitled to income from the shares for the rest of their life. When they die, their portion of shares in Mom & Pop Co Ltd goes to their children. If they are 18, then they own the shares. If they are not, the trust holds the shares for Mr Mark’s grandchildren until they turn 18.
For this article, imagine you wish to buy 25% of Mom & Pop Co Ltd shares.
Practical Considerations
Where someone owns shares which are not in trust, your position as a buyer is straightforward. As long as they have the legal right to sell the shares, you can purchase them without any problem. To prove that they have the legal right, they just need to prove their name is on the title to the shares. If their name is on the share certificates, then in nearly all cases, you can be confident they have the right to sell them.
But where there is a trust, your position as a buyer can become more uncertain. When you buy the shares in Mom & Pop Co Ltd, you purchase shares from a trust but you want to be sure that the trustees have the power to sell them. This power is not the same as the legal right to sell shares. One of the trustees’ names will be on the shares, but just because they can legally sell them does not mean that, if they do, it is a lawful sale.
For instance, imagine your proposed purchase price substantially undervalues the shares’ actual price, and as Mr Smith and Mr Menger acted with wicked intentions, which you are unaware of, they sell them to you at that price. As a general rule of trust law, trustees cannot sell trust property at an undervalue, so this would be an unlawful sale.
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Your Position In an Unlawful Share Sale
If trustees sell you shares as an unlawful sale, the court is unlikely to try and unwind the transaction. The beneficiaries will have to claim against the trustees in their personal capacity. Also, you will not face any personal liability unless you know they acted contrary to their duties.
However, the trust’s beneficiaries could initiate costly legal proceedings against the trustees. If the trustees act as directors for the company, the company itself could become a party to any dispute, which may diminish the value of the shares in the company.
The beneficiaries could claim you knew that the trustees agreed to an unlawful purchase and claim against you at a significant expense.
Therefore, you want to ensure that trustees have the power to transact with you as soon as possible in the transaction process.
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Protecting Your Position as a Buyer
Contractual Protections in Share Purchase Agreements
Ideally, you should get a contractual promise from the trustees in the share purchase agreement to state that they have the power to sell you the shares. If this was a lie, you could rely on this statement as proof that you acted honestly and in good faith — what the law calls a bona fide purchaser.
However, many trustees are not prepared to give this because they assume significant personal liability if it later turns out to be incorrect. Your legal representative should, therefore, negotiate with the sellers. This will ensure that the contract balances your and the sellers’ interests.
Structuring Delayed Payment
Depending on the kind of contractual protections you negotiate in the share purchase agreement, your legal advisors may suggest that you require the seller to agree to accept a deferred payment until the warranty period expires. This ensures that you will not have committed any of your cash to the purchase until you are confident that the beneficiaries will not try and challenge the lawfulness of the transaction.
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Key Takeaways
If you are buying shares from a trustee, you must ensure they have the power to sell them to you. Although trustees can dispose of shares, that does not automatically make it a lawful transfer. Where the sale is contrary to the terms of the trust or the interest of the trust’s beneficiaries, the sale will not be legal. Therefore, you should make yourself aware that the sale is lawful, which can be done, for example, by negotiating contractual terms in the share purchase agreement that better protects your interests.
For more information on what it means to purchase shares from a trust, LegalVision’s experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
To purchase shares, the trustee must sign over the shares to you using a share transfer form.
When would a legal share transfer be unlawful?
A legal share transfer is unlawful if the transaction is not in the interest of the trust’s beneficiaries or exceeds the power given to the trustees, which means that the trustees are in breach of their duties to the trust.
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