At the outset you may all be hopeful for the future of your business, however life changes and sometimes shareholders may need to leave. Whether it is to retire, relocate or move in a different directions, there will be times where shareholders will be seeking a change and to part ways with the company.
When this situation occurs you need to be prepared and know how to approach this. Such a change can have a huge impact on a business and you need to have a plan to make the transition as smooth as possible. You don’t want your business to be disrupted and it potentially affect your profitability and investor’s confidence. A well-written agreement would be able to detail this carefully, defending you against such effects.
Common Reasons Shareholders Leave
Before we discuss what happens when a shareholder leaves a company, first, we must determine the common reasons why they might choose to do so. There are such a range of reasons to cause someone to leave from personal to commercial. Often from the business’ perspective it is best to group these because you will want to treat their departures in different ways. Normally you would group these into good and bad reasons known as ‘good leavers’ and ‘bad leavers’, these may change from business to business, it is important that these are defined clearly.
Examples of a good leaver might be:
- Disability or incapacity
Examples of a bad leaver might be:
- Personal bankruptcy
- Termination of employment
- Gross Misconduct
Problems That May Be Caused By a Shareholder’s Departure
Regardless of the reason, a shareholder leaving the company can cause problems to those that will be left behind. Here are some common examples:
- When a major shareholder leaves a publicly traded company, the value of the company’s stock may fall.
- An investor’s departure may signal trouble to other investors, causing them to sell their shares, which could further reduce the value of the company.
- In smaller companies, a shareholder’s departure could leave a hole in the company’s leadership that the remaining shareholders might find difficult to fill.
- If a company doesn’t have a share transfer agreement in place, disagreements may occur over the value of the outgoing shareholder’s ownership interest. A third-party may be required to conduct a business valuation to facilitate the sales of the shares.
Steps a Shareholder Should Take When Leaving the Company
If you’re a shareholder in a company, here are several important things you should take to ensure a quick and problem-free exit.
1. State your reason for leaving
When notifying the board of directors or your fellow shareholders of your plans for leaving, you must clearly state the reason why. This will help them know whether you qualify as a good leaver or not and will dictate how they organise your removal. You should also specify what your future plans are, the business may be able to organise it in the most tax-efficient way. If you wish to pursue employment in other companies, particularly in competing businesses you need to look at the agreement carefully since there may be non-solicitation or non-competition terms that could prevent you from doing so.
2. Determine how you can sell your shares
Check if your company has a signed shareholders’ agreement. This document may dictate whether you can sell your shares, to whom, and at what price. If your company has one, it may automatically mean that you are offering your shares for sale upon your resignation.
If the shareholders’ agreement requires you to make an offer to your fellow shareholders’ first before selling them to a third party, find out who amongst them is willing to buy your shares. If they do not want to or cannot accept your offer, ensure that you have an alternative buyer ready to help you get rid of your shares.
3. Establish how much your shares are worth
Prepare your share certificate before your departure and determine how much your shares are worth. Check the shareholders’ agreement (or the Articles of Association if the company doesn’t have one) as it usually has a valuation formula for determining share value when a shareholder wants to sell their share. This valuation is often affected by your reason for leaving and if you are deemed a bad leaver your valuation may be reduced.
Depending on who purchases your shares and how, it can be important to write up an agreement for the sale of your shares. This can be required where you are offering extended payment terms or selling it to an outsider who needs to sign their acceptance of any existing terms that are in force.
4. Ensure that your departure is officially recorded
After the terms of your departure has been approved, see to it that it is officially recorded. Check Companies House, see if it has been updated and ensure that it has been properly notified that you are no longer a director/shareholder of the company. This helps ensure that the liabilities or duties and responsibilities you have for the company will end with your exit.
Steps the Company should Take When a Shareholder Leaves
The company must also do their part when a shareholder expresses their wish to leave. Because you cannot exactly predict what happens when a shareholder leaves a company, it is best to be prepared to ensure a smooth and hassle-free transition.
1. Ensure that your company has a shareholder agreement
Shareholder agreements set the procedure that the shareholders must follow when one of them expresses their intent to leave the company. It dictates who amongst the remaining shareholders can buy the shares of the outgoing shareholder or if the company itself must buy out the shares. It also determines how to measure the value of the shareholder’s ownership interest and may detail the payment terms for the share transfer.
Every company with multiple owners should have a shareholder agreement. Otherwise, disagreements could arise.
2. Follow share buyback procedures
If nobody wants to purchase the shares of the outgoing shareholder, the company can buy them instead. This procedure is called share buyback, and its rules are outlined in Part 18 of the Companies Act 2006. To ensure a successful share buyback, the following conditions must be met:
- A company must have at least one non-redeemable share;
- The shares to be sold should be fully paid; and
- The company should pay for the shares on purchase unless they are buying them as part of an employee share scheme.
3. Update your company’s share records
The company’s share records must also be updated to reflect that change in the list of shareholders and/or company leadership (if the shareholder is also a member of the board of directors). They should also notify Companies House of the shareholder’s departure.
Change is inevitable, especially in the world of business. Because you cannot predict who will remain with you until the end, it would be wise to be prepared for any eventualities. For instance, preparing a shareholders’ agreement or a buyout agreement is a great way to prepare for the future as it helps ensure a smoother transition when a shareholder leaves the company.
If you need help drafting a shareholders’ agreement, speak to BEB. We can write a shareholders’ agreement to suit your exact needs.
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