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Do not panic if one of your company’s shareholders wishes to exit the business and sell their shares. While it can be challenging to navigate, it does not necessarily signal any alarm or issues for your business. Likewise, it does not need to worry other shareholders if you manage the situation well. This article sets out three tips for managing shareholder exits, including: 

  • the relevance of your shareholders agreement; 
  • checking for the drag along and tag along rights of the shareholder in question; and 
  • maintaining clear lines of communication with other shareholders. 

Follow the Process in Your Shareholders Agreement

Whenever a shareholder announces their intention to sell their shares and otherwise exit your business, you first want to check the required process. A common mistake is believing you know what needs to happen. You may overlook checking any formal requirements in your shareholders agreement

The shareholders agreement is a helpful resource because it sets out the particular rights and obligations of the shareholder in question. If the shareholder has other obligations or responsibilities, you may need to ensure that other shareholders or members of the business can cover those roles. The shareholders agreement can also offer certainty if there are disagreements between you and the exiting shareholder regarding how to proceed.

Check for Drag Along and Tag Along Rights

An essential step when a shareholder is seeking to leave your business is to check for drag along and tag along rights. Additionally, you need to check whether they apply in the case of the shareholder in question. 

Drag along rights give majority shareholders, who have agreed to sell their shares to a third party, the capacity to require minority shareholders also to sell their shares to the same buyer. In other words, they are ‘dragging along’ other shareholders in their transaction. Of course, this has serious consequences for other shareholders and will prioritise your management of the sale. Luckily, these drag along rights are only usually applicable when you are selling the entire company.

Tag along rights are also relevant to check. These provide minority shareholders with the ability to sell their shares through ‘tagging along’ with a share sale by another shareholder. They will be able to sell their shares under the same terms and conditions as the majority shareholders. Tag along rights stop them from being left in a position they may not want to be without the majority shareholder. Again, if these rights are relevant, you will need to directly address them with the exiting shareholder and other shareholders.

Clear Communication With Other Shareholders

Shareholder exits do not necessarily indicate anything concerning about the business or state of operations. However, sometimes others can negatively interpret this, no matter the underlying circumstances. Consequently, a good strategy is to ensure you communicate clearly and effectively with other shareholders when you become aware of one shareholder looking to exercise their right to leave the company. Do your best to ensure that no concerns or inaccurate information spread about the exit. Likewise, make yourself available to clearly detail the process to other shareholders who may be curious.

Key Takeaways

It can be difficult when other shareholders in your company want to exit the business and sell their shares. When managing that situation, the first place to start is the shareholders agreement. This should clearly set out the process and rights of shareholders in a share sale situation. Likewise, you should specifically check to see if drag along and tag along rights are relevant. Finally, communicating with other shareholders is essential and can help reduce disruption or anxiety within your broader shareholder base. If you have any issues with shareholder exits or have questions around drag along and tag along rights, contact LegalVision’s business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

When is the shareholders agreement relevant when shareholders want to exit?

Your company’s shareholders agreement will set out rules and processes for what happens when shareholders want to sell their shares and exit the business. The advantage of these formal rules is that it reduces ambiguity regarding what to do in those situations. It also ensures that all shareholders can be clear on their rights, for instance, drag along and tag along rights).

What are drag along rights?

Drag along rights enable a majority shareholder to force (or drag along) a minority shareholder to join in the sale of shares. The majority owner must usually give the minority shareholder the same price and other terms as their sale.

What are tag along rights?

Tag along rights give a minority shareholder the ability to ‘tag along’ when another shareholder sells their shares. The minority shareholder can then join in the sale of the other shareholder’s shares at the same price and conditions.

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