The first most important thing to consider is what legal entity you are involved with; and secondly, whether you had any agreements in place that govern how you exit a company if you have shares of a company, or are involved with a partnerships.
Partnerships and companies limited by shares are different in the eyes of the law so the process is unlikely to be the same. However, where proper consideration has been given to possibilities of someone leaving, quite often a partnership agreement or a shareholders agreement will have been entered into to govern this event occurring, with its aim to try and keep matters as tidy as possible. Reasons for leaving are not completely important, but it does help smooth the process and hopefully keep matters as amicable as possible.
For the purposes of this blog, we concentrate on shareholders. Things to consider are:
- Is the shareholder a director as well? It is quite common for shareholders to also have a day to day running of the company. Any shareholders agreement may need to look closely at circumstances that either compel (or force) a shareholder to sell; for example if the shareholder committed a gross conduct offence as an employee, or committed fraud, then they may have no choice but to sell them either back to the company or to the other shareholders. That said it is possible to remain a shareholder, but not a director, but it can, in circumstances where the relationship between all parties has broken down, could cause issues for the running of the company in the future.
- There may be a provision in a shareholders agreement that you sell them to your fellow shareholders first. If so, you must comply with this. If, however, your shareholders are offered them and reject them or cannot afford to buy you out, then you may be able to sell to a third party.
- How will your shares be sold? They may be brought back by the company (called a Share Buy Back) or by a a shareholder itself. Either option will need careful consideration of a solicitor and an accountant to work out what the best approach is for the company from all perspectives.
- Will your fellow shareholders want any restrictions on you? For example, stopping you from competing or setting up shop nearby for the same type of work? Restrictive covenants can prevent you from competing with the company, but they must not be so unreasonable to stop you working in your industry, unless there is a very good reason to do so. You may want to seek legal advice if you are presented with anything like this.
- Seek valuation of your shares. This will help you determine how much your shares are worth. This could be already factored into any shareholders agreement, but where it is not, then you may want to seek an independent valuation or speak to the company accountant to help with negotiations as to the consideration you may receive.
A share transfer can be effected by a stock transfer form, but of course that gives little protection for the buyer. You may be asked to sign a share purchase agreement if a shareholder is purchasing your shares, or a buyback agreement (or an off-market purchase agreement) if the company are buying back your shares itself. Either way, there will be a lot to consider in those documents and so that you fully aware the extent of what you are giving up, or what obligations are being imposed on you.
For further advice about your situation, get in touch with the Commercial Team at Nockolds on 01279 755777.