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Company directors can also be shareholders within the same company. You may be both a director and shareholder and wonder what will happen to your shares if you resign from the company. The processes and procedures surrounding whether or not you have to sell your shares depend on certain factors and vary from business to business. The article will outline scenarios where you may have to sell your shares and your options when selling. 

Resignation of a Company Director

Before you resign as a director, there must be at least one other director that will continue to run the company. This means that if you are a sole director, you will need to ensure a second director is appointed before resigning. Under the Companies Act, you can resign as a director by signing a written notice of resignation and providing this to the company. Next, you must notify the Companies Office of your resignation within 20 working days.

Checking the Shareholders Agreement

The first step in understanding whether you need to sell your shares is checking the shareholders agreement. This confidential document will usually outline whether or not you have to sell your shares if you resign as a director. It may also specify if you have to sell the shares back to the company and its process. If pre-emptive rights exist in the shareholders agreement, you may need to offer your shares to other existing shareholders in the company first. 

A pre-emptive right is when the shareholders in your company have the right of first refusal. This means that your company must first offer your shares to other shareholders before offering and selling them to third parties. 

The shareholders agreement may outline if a trigger event could result in your being forced to sell your shares. A trigger event, usually referred to as an event of default or leaver event, will trigger you to sell your shares.

There can be bad leaver events that involve an element of fault by the selling shareholder, such as an early resignation or conducting business activities for an improper purpose. Usually, in the case of a bad leaver event, you will have to sell your shares at a reduced price. However, there can also be good leaver events where a shareholder cannot provide a service to the company due to reasons outside their control, such as redundancy. In case of a good leaver event, you can probably sell your shares at the full market value. 

Circumstances Where You Have to Sell Your Shares 

No Trigger Event

There may be an instance where the shareholders agreement does not define that a resignation will create a trigger event that requires you to sell your shares. In this case, you will not be forced to sell your shares and will continue to be a shareholder following your resignation. An exception is, of course, you choose to sell your shares at the same time as resigning).

Additionally, before you decide to keep your shares in the company, it is important to consider:

  • company performance – how well the company may do in the future;
  • whether you will still receive dividends from the company; and
  • how much control you have.

Shareholders Agreement Outlines a Trigger Event

If the shareholders agreement outlines that your resignation will create an event of default or leaver event, you will have to sell your shares. Likewise, you must follow the process in the shareholders agreement. Once an event of default has occurred, you must provide written notice of this. Following this, your shareholder rights and role as a director will automatically terminate. 

Wanting to Sell Your Shares

The last scenario is that you may resign and decide you want to sell your shares even though you do not have an obligation to do so. The shareholders agreement may outline the processes for selling your shares and you will have to adhere to those processes. For example, the shareholders agreement may outline that pre-emptive rights exist for all existing shareholders. Hence, you must first offer your shares to the existing shareholders. 

The shareholders agreement may, in some circumstances, provide an ability for the company to buy back your shares. However, there are specific steps that companies must take to undertake a buyback. Therefore, seeking legal advice is critical. 

The last option to sell your shares is to sell them to a third party. You may need approval from the directors to do this. You will also have to set up a share sale agreement which entails the:

  • number, class and price of shares you are selling;
  • sale mechanics; and
  • vendor and purchaser warranties.

Once your company sells your shares to a third party, the company will need to update its share register. Updating its share register ensures evidence of ownership. Finally, it will also need to update the Companies Office.

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Key Takeaways

If you are looking to resign as a company director, you need to check the shareholders agreement and constitution to understand your rights on resignation. For example, check to see the requirements for selling your shares. Indeed, you may choose to resign and sell your shares to existing company shareholders or a third party (even if you have not triggered a forced sale). 

If you need legal services in understanding what will happen to your shares if you resign, our business lawyers can help you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

What is a trigger event?

A trigger event is a situation where you will have to sell your shares. Typically, your shareholders agreement will outline what situations constitute a trigger event. It can also be called an event of default or a leaver event. 

Is it possible to resign and keep my shares?

You may be able to resign and keep your shares if your resignation does not trigger an event of default or leaver event. You will have to check your shareholders agreement to confirm this.

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