Term
Settlement share
The amount a company pays a shareholder whose membership ended other than by transfer, such as by expulsion or death without a successor. It is calculated from equity in the accounts as at the day membership ended.
Updated
What it means
A settlement share is the cash payment to which a shareholder of a limited company is entitled when their participation ends other than by transferring their stake. Typical cases are expulsion, termination of participation by a court, an agreement to end participation, the shareholder’s bankruptcy, or death where the heir does not join the company.
The amount is derived from the company’s equity according to financial statements prepared as at the date participation ends, usually extraordinary financial statements. It is divided in proportion to paid-up contributions unless the articles provide another method, such as market value.
The settlement share is payable within the period set by law or the articles. The departing shareholder’s stake passes to the company, which must transfer it to someone else or reduce its share capital.
How it works in practice
When a shareholder’s participation ends we prepare extraordinary financial statements and calculate the settlement share. In companies with large hidden value, such as property carried at a low book value, the gap between book and market value often leads to disputes.
For the shareholder, the settlement share is income. The part exceeding what they contributed is generally taxed under the rules for profit shares, so we also go through dividend taxation with clients and how the contribution is evidenced.
For the company, paying a settlement share is a significant outflow. We plan it in the cash flow and check that the payment will not breach the rules protecting share capital or threaten the company’s solvency.
What to watch out for
Articles of association often say nothing about how the settlement share is calculated. In a dispute the statutory method based on book value then applies, which may suit neither side. We recommend agreeing the rules in advance.
If the company does not pay the settlement share on time, the former shareholder can sue for it with late-payment interest. If cash is short, agreeing an instalment plan is better than waiting for a lawsuit.
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