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The legal considerations for shareholders exiting a private company will often be influenced the shareholders agreement. A shareholders agreement is a legal contract between the shareholders of a company. It sets out the rights and obligations of shareholders, as well as how the shareholders will be managing the company. This article will run through a few of the legal considerations that exiting shareholders of private companies should consider. It will also outline how this relates to the shareholders agreement.

How Will the Shareholder Exit the Company?

Generally, a shareholder may be able to exit a company by way of a share sale or share buy-back. A share sale is the process whereby the exiting shareholder’s shares are sold to either:

  • a third party; or
  • the remaining shareholders in the company.

It is common for private companies to have obligations for an exiting shareholder to provide remaining shareholders the right to purchase the shares first, and such obligations would be normally set out in a shareholders agreement. If the remaining shareholders were to purchase the shares, the remaining shareholder’s shares in the company will increase.

A share buy-back, on the other hand, is the process whereby the company purchases the exiting shareholder’s shares. As a result of the exiting shareholder’s shares being purchased back by the company, the remaining shareholder’s percentage of ownership in the company will increase.

The decision as to which sales process is chosen, as well as the process for the sale of shares, would be set out in the shareholders agreement. The exiting shareholder’s decision as to how the shareholder will be exiting the company will also be influenced by tax considerations, in particular, capital gains tax. The exiting shareholder should be receiving tax advice. In particular, they should receive advice on whether the sale will lead to a capital gain.

How Will the Shares Be Valued?

The exiting shareholder should determine how the shares will be valued. The shareholders agreement should set up a process for valuation of the shares. This may include that the the company determines the value of the shares.

If a shareholders agreement does not exist, or if the shareholders agreement does not detail the process for share valuation, the exiting shareholder may need to obtain the valuation of the company’s shares through an external valuation business. In the absence of the shareholders agreement addressing the issue of valuation or a commercial arrangement agreed with the remaining shareholders to share the costs of valuation, the exiting shareholder may need to be responsible for the costs of valuation of the shares.

Are Drag Options or Tag Options Relevant to the Sale?

Drag options refer to the right of a majority shareholder to require a minority shareholder to sell its shares. Tag options refer to the right of a minority shareholder to tag on to the sale of shares of a majority shareholder. This would restrict a majority shareholder from selling its shares unless the purchaser also purchases the minority shareholder’s shares.

The exiting shareholder should consider whether the above rights exist. It also needs to consider whether it needs to take this into consideration in the sale of its shares.

Are There Any Obligations After the Exiting Shareholder Leaves the Company?

The exiting shareholder may have obligations to the company even after the shareholder leaves the company. 

These are commonly:

  • obligations to keep confidential information of the company confidential;
  • obligations to not use, or dispose or destroy, intellectual property in its possession; 
  • restraints of trade that would prevent the exiting shareholder from being involved in a business that would compete with the company for a certain period of time;
  • restraints of trade that would prevent the exiting shareholder from dealing with the clients of the company; and
  • non solicitation clauses that would prevent the exiting shareholder from soliciting personnel of the company.

The above obligations are commonly in the shareholders agreement of the company. The exiting shareholder should review this thoroughly to ensure that it can comply with any post-exit obligations.

The Importance of a Shareholder’s Agreement

As the shareholders in a private company are usually involved in the everyday management and operation of the business, the drafting of a shareholders agreement is of utmost importance to ensure that the above issues regarding the sale of shares and the obligations of an exiting shareholder are clear. This will help to reduce any potential disputes in the future. It will provide the company and remaining shareholders, with peace of mind. This is because an exiting shareholder will not cause too much disruption in the operation of the business.  

Key Takeaways

If you are a shareholder who wishes to exit a private company, LegalVision can provide advice on your options and obligations in the sale of your shares. We can also assist with drafting a shareholders agreement for companies who wish to ensure that its process for exiting shareholders is clearly set out. If you have any questions about exiting as a shareholder, contact LegalVision’s corporate lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is a shareholders agreement?

A shareholders agreement is a legal contract between the shareholders of a company, which sets out the rights and obligations of shareholders, as well as how the shareholders will be managing the company.

How can a shareholder exit the company?

Generally, a shareholder may be able to exit a company by way of a share sale or share buy-back.

Are there any obligations after the exiting shareholder leaves the company?

The obligations of the exiting shareholder are commonly to keep information confidential, to not use, or dispose or destroy, intellectual property in its possession, to maintain restraint of trade obligations and non solicitation obligations.

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