Managing a successful exit from a company is always important - but it can be hard without proper planing. Our expert team have deal with all types of issues arising from company exits by shareholders, directors and other key personnel.
A company may be set up for numerous reasons, but almost always the success of a company is determined by its profitability and sales. A company may exist to provide a business for the family, or it may be a short-term or one off venture designed to provide a quick return.
Whether it is retirement or a pre-arranged end of the business lifecycle (including a sale of the company or its business) then the directors and shareholders would normally exit the company via a sale of shares and/or retirement (as with any other occupation).
However, such an organised exit is not always the reason for owner / managers to want to leave. Often disputes may arise within a company and in the absence of a procedure to resolve such disputes – or in the absence of a satisfactory level of engagement by the parties – then one or all of these parties may have no alternative but to exit the business.
Prejudice to minority shareholders
It is not unusual in a company of any size – but particularly a small or medium-sized company – for a director to be subject to the will of other directors, who may hold sufficient shares to control the company’s affairs.
Alternatively, such a minority shareholder may have as much as 50% of the shares yet still have no control as a result of the deadlock that exists either at board level or at a general meeting or resolution of shareholders.
Quite often, in such circumstances, the minority shareholder needs to consider their rights and remedies or seek an exit from the company.
Exit of directors
A director, subject to the terms of his / her employment contract or service level agreement, is an employee and may have their employment contract terminated.
However, their statutory position as director can only be terminated in accordance with specific legal requirements normally requiring a resolution of in excess of 50% of the company’s shareholders.
Otherwise, a director’s position may be vacated under the terms of a company’s articles of association, including by retirement, or in accordance with a shareholders agreement.
As with any other shareholding, shares can be sold to a willing purchaser.
With private companies this can be a little more difficult – there is a question of valuation, there is the right of current (and potentially opposing) shareholders to have the option to acquire your shares and there is a risk as to the devaluation of your shares if you have a non-controlling minority interest.
For the remaining shareholders / directors there is the risk that the departing shareholder will take their money and set up a new company (thus damaging what is left). They leave with knowledge of the business but are no longer bound by their legal duties of fidelity and trust.
Provision for exit under shareholders agreement
A shareholders agreement can provide for dispute resolution and arrangements to properly manage the exit of an owner / manager from the company’s business, dealing with aspects relating to protecting the company and its business in the current form whilst also properly delivering a return to the outgoing shareholder (including providing for a reasonable market value and in certain circumstances avoiding any minority discount.
- whether a dispute exists necessitating a shareholder’s exit – or even if it is an exit with all parties’ agreement – then the value of their shareholding can be calculated in accordance with independently determined parameters.
- in addition, a shareholders agreement can provide a procedure for such an exit to be triggered.
Shares can be purchased by the company (which may make such a settlement agreement less onerous to the remaining shareholder(s)) or they could be simply transferred to the remaining shareholders upon completion.
At Francis Wilks & Jones we can assist with drafting the shareholders agreement to ensure your interests are protected in the event such circumstances arise.
Please call any member of our team for your free consultation now and we can help. Alternatively, email us with your enquiry and we will call you back at a time convenient for you.