How to Exit Your Shareholders’ Agreement

How To Leave Your Agreement

There are many reasons people choose to exit a company. For most, it is often due to retirement, or even sometimes, the death of a shareholder occurs. However, shareholders can often disagree with the direction that the company is being taken in and may choose to leave. Regardless of the reason behind the exit of the shareholders’ agreement, the process is technical and costly if not executed properly. This article will explore exiting a shareholders’ agreement and provisions related to that exit. 

Provisions of a shareholders agreement

A shareholders’ agreement defines the rights of shareholders‘ and comes into effect when executed. Each agreement should contain a provision relating to the exit or disposition of shares. A shareholders’ agreement should include a provision that clearly defines the process of exit. Always consult a lawyer to ensure that you follow the correct procedures. This consultation protects you from liability and provides a smooth transition as you exit the company. Hence, always consult the actual text of your shareholder’s agreement before providing notice to dispose of your shares. 

Important questions to ask

When reading your shareholder’s agreement, some essential considerations should be noted. Understanding these issues may be the difference between a smooth transition and legal action. For example, does the provision allow you to terminate at will, or is there a process that you need to follow? There may be a period where the parties have to stay together after notice of the exit. If the parties can terminate at will, this may create a sense of constant threat within the organisation. Consider what your exit strategy will be? Furthermore, the exiting party needs to consider how the assets will be treated and valued at termination? Separating a party’s contribution to the company can be a complicated process. It is also essential to seek independent financial advice to ensure the assets are objectively valued.

Specified exit clauses

It is also essential to consider some of the standard exit clauses that exist when exiting an agreement. The right of refusal/ offer clause is one of the most basic exit clauses. These clauses suggest that if you want to sell your shares, you first must offer to sell them to the other shareholders. This preferences other shareholders before third parties. Similarly, a put/call option requires the sale to other shareholders (‘the call option’) or to purchase other shareholders’ shares (‘the put option’). A Shotgun clause ensures that the sales of shares have to occur at a specific price. There may also be some restrictions on transfer, which may prevent you from selling your shares to different companies.

Finally

There are many different reasons to consider exiting your shareholders’ agreement. Always consult the text of your shareholders’ agreement. Consider some of the implications of exiting and the types of clauses that exist within the agreement. Consult a commercial lawyer if you are unsure how to exit the provisions.