Shareholders Exit Company 10 FAQs
Here you can download our What Can A Shareholder Do To Exit A Company 10 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.
As a Shareholder there will undoubtedly come a point when you wish to relinquish your Shareholding in a company for various reasons, perhaps by reason of retirement, a desire to exit as a result of a fall-out with co-Shareholders or a wish to withdraw your investment.
Sometimes the exit may be contentious and sometimes it may be by agreement of all Shareholders, in which case an agreed settlement should be relatively straightforward.
The situations in which a shareholder may seek to exit a Company are varied and in this article we attempt to address questions relating to a Shareholder exit, particularly where the situation is contentious.
1. What Are The Practicalities Behind Exiting A Company?
A Shareholder in a listed Company on a Stock Exchange merely needs to place his or her Shares for sale with the appropriate agency to exit his/her investment. This is a very straightforward transaction which occurs almost instantaneous and allows a Shareholder to exit his or her interest in that Company.
In a Private Limited Company, the exit is slightly different as there is no publicly regulated market for the Shares to be sold and neither is there any recognised share price. However, subject to a valuation of the Shares, the transaction itself is identical and relatively straightforward, by completion of a share transfer form, filing the appropriate forms to deal with the necessary tax aspects and also managing the exit from that individual’s point of view in terms of any guarantees provided to lending institutions or third parties.
Aside from this, the Company acting via its Directors will also have to approve the transfer of Shares and agree to replace that the incoming entity’s name (whether that be a Company or individual) is placed on the Share Register and the outgoing Shareholder removed. At all times it is for the Company to determine whether an incoming Shareholder can be registered on the Company’s Share Register, although it will usually be bound by its Articles of Association and any Shareholder Agreement.
Other practicalities relate to method of payment of the Shares, good leaving provisions, rights of third parties and the arrangement for repayment of the purchase monies. These are all necessities which will be incorporated in a properly drafted Share Exit Agreement.
Without a Share Exit Agreement, a simple transfer of Shares on the Share Transfer Form will not protect or indemnify the outgoing Shareholders from any potential claims that may arise against him or her from circumstances that existed prior to his or her departure.
2. What Are The Usual Circumstances Of A Shareholder Exit?
The most common circumstance of a Shareholder exiting a company exists where that Shareholder may be retiring or seeking to depart the Company for various personal reasons and wishes to dispose of his or her interest.
In such circumstances the exit is not contentious and should be relatively straightforward with all parties agreeing to the method for the Shareholder’s exit in terms of the method of transfer, valuation, payment terms and any tax or other indemnities.
Other circumstances which are more contentious include where Shareholders fall into a dispute with each other and the only way of settling this dispute is by each of the parties going in separate directions. This may often comprise an arrangement whereby one shareholder buys the other out (or a group of Shareholders could buy them out) for an agreed price, in which case it is recommended that a Share Exit Agreement be drafted as the outgoing Shareholder will want various indemnities as regards tax obligations of the Company and in respect of any other matters which they may be liable for as at the date of exit.
If all Shareholders of a Company are seeking to retire or otherwise dispose of their interest, then it may be more profitable to sell the Company on the open market. However not all private limited companies are that easy to sell and an alternative method commonly used will be to Wind-down the affairs of the Company in an organised fashion via a statutory scheme, known as a Members Voluntary Liquidation.
A Members Voluntary Liquidation is a solvent liquidation (there is no element of insolvency) of the Company’s assets and business. It enables appointed Liquidators to Wind-up the Company affairs in a controlled fashion, ensuring that all liabilities are paid and all statutory returns are made to Companies House so that the Shareholders can depart with clean hands whilst simultaneously maximising the return from their interests.
This is one of the most common form of exit by Shareholders reaching retirement and is by far the cleanest method of exit. We have a variety of Insolvency Practitioner contacts who can assist with such matters and should you require any assistance in this respect please do not hesitate to contact us.
3. What Restrictions Apply To A Disposal Of My Shares?
The most common restriction on disposal of an individual’s Shareholding is referred to as Pre-Emption Rights.
A Pre-Emption Right will be set down in the Company’s Articles of Association and/or in any Shareholders Agreement (which normally amends such Rights relevant to the individual Shareholders’ interests). They will describe the restriction on the disposal of any Shareholding and this will usually require that the price offered by an interested third party must first be offered to the existing Shareholders, who should have the first opportunity to purchase such Shares (with a view of avoiding external third party interference with the Company and its original common objectives).
Older companies, perhaps those incorporated as a family Company historically, may alternatively provide that Shares may only be disposed of to family members. Such a Pre-Emption Right is very restrictive as it prevents the disposal of Shares wholly to the world at large and may have a severe impact on the value of any such Shareholding.
Shareholder agreements may also include Pre-Emption Rights and will often take priority over the Articles where there is any conflict between such terms. A Shareholder Agreement will define exactly how shares in a Company may be disposed of and this is a very useful tool to prevent outside unwanted interference into a private Company’s business which was set up between associated parties.
4. Can Shares Be Transferred To A Company?
It is quite common for corporate Shareholders to exist as part of either a group UK corporate structure or for various purposes using offshore companies.
It is not uncommon for an individual to dispose of their Shares to an offshore Company which may act as a vehicle for a self-administered private pension or as part of another investment structure.
However, as from 2015, the Small Business, Enterprise and Employment Act 2015 states that the Company must continuously maintain a register of the beneficial ownership of Shares and accordingly this approach to dispose of Shares for personal investment or pension purposes may soon no longer be as effective.
You should of course seek professional accounting and tax advice on any such tax arrangements before making any such decision to transfer Shares out.
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5. How Do You Value A Shareholding?
6. Is The Valuation Determinative Of The Price To Be Paid?
7. What Of The Value Of A Minority Shareholding?
8. How Can I Force An Exit From A Company Where No Other Solution Exists?
9. What Other Considerations Are There When Exiting The Company?
10. Is A Share Exit Agreement Always Necessary?
Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.