On Wednesdays (other than wearing pink) we’ll bring you a legal update so you can up your legal knowledge game.
So, after years of working together you may find yourself at odds with another of your shareholders. It may be that they’re more interested in another business venture of theirs, their life circumstances may have changed; heck, you may just disagree on the preferred settings on the office coffee machine. You’ve decided that, in the best interest of the business, they’ve got to exit. The problem is, how does one exit a shareholder that doesn’t want to leave?
The legal position is pretty difficult. That’s because your base position is that there’s no way you can exit a shareholder without their agreement either obtained previously or now if they are to leave. In order for agreement to be obtained previously, it would come in the form of a tailored constitution or shareholders’ agreement/deed or otherwise the rights attached to their particular class of shares allow for the company to redeem or take back those shares. If any one of these are not in place prior, then it would normally require some form of agreement from the exiting shareholder to transfer their shares. Usually, for a (possibly large) sum of money.
We mentioned a tailored constitution or shareholders’ agreement/deed. What we meant was that standard off-the-shelf versions of these documents are deliberately generic and would not take into account the unique circumstances of your business and the unique relationships between your shareholders. Getting good legal advice in the planning stages either at set-up or when introducing new shareholders is just as important as good financial/accounting advice. Otherwise, good legal advice is also important in negotiating with the exiting shareholder if their agreement is being sought in the wake of their proposed exit.