Share Buyback in a Family Dispute

A share buyback in a family dispute is a solution to a problem. The problem is that the family members aren’t getting on. Relations are strained, and this is hurting the family business. It’s difficult to make decisions. Family members want to take the business in different directions. Even small things like agreeing a salary increase is a struggle. I’ll guide you through a case to shed more light on the subject. Let’s focus on

Background
The Dispute
Share buyback
Taxes
Summary

Background

Mike and Nora Hart set up Hart Industries in Glanbally, a village in Co Waterford, in the 1980s. Mike retired in 2019 and passed his 100 shares to his two sons, John and Kevin. John got 60 shares and Kevin got 40, much to his annoyance. Jonathan, only his mother called him this, was quite a guy. Women loved him, men were jealous of him, you couldn’t but like the guy. He did everything fast. Fast cars, fast races. He did 30 minutes for the 5-mile Marine climb in 2020. He’s more into fast food these days!

Kevin, the joker of the family, was a bit different. He liked to do things slowly. The great procrastinator. It would take him forever to make a decision, and after all that deliberation, it was usually the wrong one. His constant joking around drove John cracked. The Hart brothers were chalk and cheese. They tolerated each other at best. Despite that, they had certain skills. John was brilliant with people, and Kevin was a numbers guy. It was a pity they didn’t get on as they were brothers in arms when they were younger.

The Business

The business of Hart Industries is engineering. The company makes components for the aviation industry. Old Mike flew planes for the defence forces back in the day. Back in July of 2019, when Mike gifted the shares to his sons, the company was worth €5,000,000. Charles Murphy of Murphy, Murphy, Murphy & Sons did a valuation at that time. While it was a good business at that time, it was only in the last few years that the business took off. It has much more cash now. Too much for John’s liking as Kevin won’t release the purse strings.

2019 Transfer

The 2019 transfer of shares happened on Friday, the 13th of July. That day the Hart brothers became millionaires. Not that they felt any different. On paper, they were millionaires, but not a lot changed in their daily lives. Mike stepped back, and John took up the reins as general manager. He put in the hard yards, meeting their best customers in Europe and in the States. All the while making sure his own growing family was well looked after.

Meanwhile, Kevin looked after the finances. He was a worrier. Always wanting to save for the next crash, he hoarded cash, was slow to pay suppliers, and a pay rise was a no-go area.

Taxes on transfer

Wily Charles Murphy ensured the taxes on transfer in 2019 were very low. There was no Capital Gains Tax for Mike as he availed of Retirement Relief. Neither John nor Kevin paid gift tax as they got Business Property relief. The only tax they paid in 2024 was stamp duty. John paid €30,000, being 1% of €3,000,000, and Kevin paid €20,000, 1% of his shares worth €2,000,000.

The Dispute

The dispute has turned into a feud. Dislike turned to hate. There is no turning back as far as John is concerned. Kevin has gone rogue per John. Some of the issues he mentions are very worrying. They disagree on almost everything

Kevin won’t agree to a pay rise for John, who hasn’t had an increase since 2020
Kevin won’t agree to set up a company pension scheme for both of them
John wants to invest in solar panels for the factory roof. That would reduce their electricity costs and secure their supply. Kevin isn’t in favour.
Kevin is only working part-time since January 2023, but is still on the same salary. They had to hire extra finance help to plug the gap

John feels the lack of investment in the business is very worrying. His fear is that they will be left behind as competitors invest in new technology and innovate. There’s already an issue with staff retention. He knows lads are leaving because they’ll get ten grand more in town, even if it is shift work. All this pressure is on him while Kevin is off touring Europe doing comedy gigs. He thinks it’s just crazy, as there’s lots of cash in the company and they are not using it wisely at all.

Things get out of hand at the family barbecue in June 2024. John, while cooking the steaks, notices Kevin touching Amanda’s leg. She recoils in horror, and John waits for his chance. He follows Kevin to the bathroom, confronts him, and ends up punching him in the face. Like Will Smith but with more damage to include a broken nose. The Hart boys haven’t talked since.

Share Buyback

Sean O’Toole, Kevin’s advisor, suggests a share buyback could be an option. He wants nothing to do with the company and sees no way of patching things up with John after what he did to him. But he knows John even wants him gone more than anything, and Kevin wants every last euro he’s entitled to. Ideally, he’d love to have four million euros left after taxes. He’d have doubled his investment in six years.

A share buyback is where the company, Hart Industries, buys Kevin’s shares from him. After buying the shares, the company cancels them. Rather than having 100 shares in issue, the company would have 60 shares in issue. All of which John owns, so he would then own 100% of the company. Kevin would resign as a director of the company and would no longer have any connection to it.

Company Valuation

John and Kevin need a company valuation. This will confirm how much the company is worth, taking account of profits and existing cash. Kevin engages Ger Foley of Foley, Foley, Foley & Sons to do the company valuation. He know that Ger loves nothing more than getting stuck into a juicy valuation. But why do you need a valuation?

You need one because the transaction is between connected parties. Revenue rules confirm that transactions between connected parties must be at market value. Plus, Kevin wants to know that he is getting a fair price for his shares. Ger works his magic and comes up with a figure of €12,000,000.

Future maintainable earnings	€1,250,000
Multiple	4
Value of the trading company	€5,000,000
Existing Cash	€7,000,000
Total Value	€12,000,000
Value of 40%	€4,800,000
Discount Factor – 20%	€960,000
Net Value	€3,840,000

Given that Kevin has a less than 50% shareholding, when valuing those shares, you would apply a discount. The discount factor for his shares is between 20% and 30%. When Ger tells him about this, he isn’t best pleased. In his head, the shares are worth close to €5 million, and that’s what he wants.

Taxes

What will Kevin have left after taxes? The numbers look like this. Let’s assume he gets €4.8 million. Remember, his base cost is €2 million. That was the value of the shares that his dad gave him in 2019.

Sales Proceeds	€4,800,000
Less Cost	€2,000,000
Gain	€2,800,000
CGT 33%	€924,000
Net Proceeds	€3,876,000

If he gets €5 million for his shares, he’d have €4 million net after taxes. However, John isn’t willing to go that high as he thinks Kevin is getting a very sweet deal as it is.

CGT and not Income Tax

Kevin asks Sean to make sure it is CGT and not Income Tax. He is spending time on Chat GPT and on the Revenue website, taking a keen interest in tax all of a sudden! Sean ensures him that the money he gets for his shares will be liable to CGT. That’s because the transaction meets the benefit of the trade test. To get CGT treatment, certain rules apply to include

The company is an unquoted trading company
The purchase must be made for the benefit of the company’s trade
The transaction isn’t part of a scheme to enable the owner of the shares to participate in the profits without receiving a dividend
Kevin must be resident and ordinarily resident in the State
Kevin must have owned the shares for 5 years
There must be a proportionate 25% reduction in Kevin’s interest in the issued share capital. [There will be a 100% reduction]
Kevin mustn’t be connected with the company after the transaction.

Benefit the trade

Does the share buyback benefit the trade? We look to the Revenue guidance on this matter.

Revenue will normally regard a buy-back as benefiting the trade, where, for example:

“There is a disagreement between the shareholders over the management of the company. And that disagreement is having or is expected to have an adverse effect on the company’s trade and where the effect of the transaction is to remove the dissenting shareholder.

The purpose is to ensure that an unwilling shareholder who wishes to end his/her association with the company does not sell the shares to someone who might not be acceptable to the other shareholders.”

To me, the share buyback will benefit the trade. Kevin wants out. John wants him gone. Once he’s gone, John can drive on the business, invest in new technology, reward and retain staff, including himself. While it pains him to pay out all that money, he knows that he can make this business even more successful.

CGT reliefs

For my CGT calculation, Kevin won’t get Retirement Relief. He isn’t over 55, and he hasn’t owned the shares for 10 years. Plus, he won’t meet the director’s working requirement test.

He could get Entrepreneur’s Relief [ER], but that will depend on his working time in the company. He must have

spent 50% or more of his time working for the company in a managerial or technical capacity and
served in that capacity for a continuous period of three years. The three years must be in the five years before the disposal of the shares.

If Kevin can get ER, it would save him €230,000. He’d pay 10% CGT on the first €1,000,000 of the gain with the balance at 33%.

Clawbacks

Be careful of any clawbacks that are out there. There are two in this case. If the solicitors do an amazing job and get everything signed off in June 2025, there will be blood! There would be a clawback of

Retirement Relief and
Business Property Relief

The retirement relief clawback is the CGT that Mike didn’t pay in 2019. The value of the shares given to Kevin of €2 million would result in a CGT liability of €660,000. That falls on Kevin and not on Mike. Plus, Kevin got relief from Gift Tax, through Business Property Relief of €1.8 million. Assuming there were no other gifts or inheritances in Group A, the Gift Tax clawback is

Business Property clawback	€1,800,000
Less unused Group A threshold	€135,000
Balance liable to CAT	€1,665,000
Tax 33%	€549,450
Add CGT liability	€660,000
Total clawbacks	€1,209,450

So, all documentation for the share buyback should be dated after the 13th of July 2025.

Summary

A share buyback in a family dispute can be a good solution. But the stars must align. In an ideal world, there would be enough cash in the company, so a borrowing isn’t needed. Quality advisors on both sides will help get a deal over the line. But you need to be mindful of the taxes, so there are no skeletons in the cupboard that pop out at a later stage.

Roll on 5 weeks and it’s Friday the 18th of July. Mundy’s July song is blasting over the airwaves. If only we had the weather to match the song! All parties meet in the offices of O’Toole, O’Toole, O’Toole and Sons. They sign on the dotted line. The brothers scowl at each other. John is a bit more bitter than Kevin. Kevin struts out the door with Fleetwood Mac’s Go Your Own Way entering his brain

You can go your own way

Go your own way

You can call it

Another lonely day