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As businesses grow, it is quite common for shareholders to want to cash out some of their shares through selling. Reasons for selling do not necessarily have to be because of a shareholder dispute or a loss of faith in the business. Shareholders might be leaving the area or retiring from business work, or even just looking to reallocate their capital. 

No matter why you are considering selling your shares in a private company, there are some essential elements to consider. This article will discuss:

  • pre-emptive rights;
  • disclosure obligations; and
  • how to determine the price of the shares you are selling.

Consider if There Are Pre-Emptive Rights

Pre-emptive rights give a company’s shareholders the right to buy shares that another shareholder is selling before making an offer to unrelated third parties. Either the company’s constitution or its shareholders agreement will outline the specifics of these terms. You should check those documents to see what the specific details and processes are for your company. 

The idea behind pre-emptive rights is to protect the relative position and rankings of existing shareholders. Likewise, pre-emptive rights give existing shareholders some control over the transfer of shares to unrelated third parties. Your company may not have a constitution nor a shareholders’ agreement. If there are no pre-emptive rights on a sale of shares, the selling shareholder can sell to anyone outside of the company without first offering their shares to the other shareholders.

It is best practice for companies to adopt a constitution on incorporation. You may also consider engaging a lawyer to discuss whether a shareholders’ agreement is appropriate for your company.  

Remember Your Disclosure Requirements

A key consideration when selling shares is your disclosure obligations. New Zealand law has specific (and extensive) disclosure requirements set out in the Financial Markets Conduct Act 2013 (FMCA). These are in place to protect purchasers, given the asymmetry of information between the seller, the company and any buyer. These disclosure requirements will apply unless you can rely on one of the exclusions in Schedule 1 of the FMCA. 

In particular, some exclusions regarding small or private sales may apply to your sale. It is essential to work through these exclusions carefully to work out whether you can rely on any of these. Importantly, even when an exclusion applies, you may still need to comply with some limited disclosure requirements. Additionally, given the complexity of the disclosure requirements and how they and any exclusions may apply to your sale, it is vital to discuss your disclosure obligations with your legal advisor first before going ahead with any sale.

Determining the Price of Your Shares 

Naturally, the price you sell your shares is one of the most important steps in selling. Again, obtaining advice from a lawyer and an accountant is vital. Ensure you receive advice appropriate to your circumstances. These specialist advisors will help make sure you follow the correct procedure to determine the appropriate price for your shares.

For most companies, the constitution or shareholders’ agreement will specify the sales process you must follow. It will also detail how you should value your shares. Having a formal, pre-decided process usually helps minimise disagreements between shareholders. There may be no agreed formula for determining the value of your company’s shares. In that case, it is advisable to negotiate an agreement that works for yourself, the purchaser and other shareholders. There are also experts in valuing private companies with who you can engage if required. 

Key Takeaways

There are some key things to consider when selling your shares in a private company. Typically, the company’s constitution or shareholders agreement will set out the process for share sales. Likewise, it will outline how you should value shares. A pre-determined formula is a useful way of arriving at an agreed fair value. If there is no formula, getting expert third-party assistance is a typical step in the process. You should check whether other shareholders at the company have pre-emptive rights. Also, keep in mind any disclosure requirements that may apply to a sale to third parties.

If you want to know more about selling your shares in a private company, contact LegalVision’s corporate lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What are pre-emptive rights?

Pre-emptive rights give a company’s shareholders the right to buy shares that another shareholder is selling before making an offer to unrelated third parties. The idea behind pre-emptive rights is to maintain the proportionate holdings of existing shareholders and give them some control over shares to unrelated non-shareholders.

How does the price of the shares get decided?

Usually, the company’s constitution or shareholders’ agreement will set out the sales process you must follow when selling shares and how to value your shares.

What are the disclosure requirements if you are selling shares in a private company?

These are specific to the particular circumstances of your sale and the identity of the buyer.  We recommend you seek legal advice to ensure that you comply with any disclosure obligations that may apply to your sale.

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