As the saying goes, “Nothing is permanent in this world except for change.” Whilst everyone may have high hopes with the business at the beginning, some shareholders may feel it’s time to leave and seek a change of pace later on. Whether it’s to retire from the business or seek greener pastures, there will come a time that a shareholder may want to part ways with the company.
Because such an occurrence can have a significant impact on the business, it’s best to be prepared when a shareholder expresses their intent to leave the company. This way, daily business operations won’t be disrupted and investor confidence won’t be affected.
Common Reasons Shareholders Leave and the Problems That May Cause
Before we discuss what happens when a shareholder leaves a company, first, we must determine the common reasons why they might choose to do so. There are many factors that may prompt a shareholder to leave, including:
- Death
- Retirement
- Divorce
- Personal bankruptcy
- Disability
- Termination of employment
Regardless of the reason, a shareholder leaving the company can cause certain problems to those that will be left behind. Here are some common examples:
- When a major shareholder leaves a publicly traded company, the value of the company’s stock may fall.
- An investor’s departure may signal trouble to other investors, causing them to sell their shares, which could further reduce the value of the company’s stocks.
- In smaller companies, a shareholder’s departure could leave a hole in the company’s leadership that the remaining shareholders might find difficult to fill.
- If a company doesn’t have a share transfer agreement in place, disagreements may occur over the value of the outgoing shareholder’s ownership interest. A third-party may be required to conduct a business valuation to facilitate the sales of the shares.
Steps a Shareholder Should Take When Leaving the Company
If you’re a shareholder in a company, here are several important things you should take to ensure a quick and problem-free exit.
1. State your reason for leaving
When notifying the board of directors or your fellow shareholders of your plans for leaving, you must clearly state the reason why. This will help set the tone in which you organise your departure. You should also specify what you want to do going forward. If you wish to pursue employment in other companies, you should take legal advice either as a shareholder/director regarding this matter as there may be certain terms that could prevent you from doing so.
2. Make the necessary preparations
Prepare for your departure by filing the necessary documents. Also, check if your company has a signed shareholders’ agreement. This document may dictate whether you can sell your shares, to whom, and at what price. If your company has one, it may automatically mean that you are offering your shares for sale upon your resignation.
3. Determine how you can sell your shares
Prepare your share certificate before your departure and determine how much your shares are worth. Check the shareholders’ agreement (or the Articles of Association if the company doesn’t have one) as it usually has a valuation formula for determining share value when a shareholder wants to sell their share.
If the shareholders’ agreement requires you to make an offer to your fellow shareholders’ first before selling them to a third party, find out who amongst them is willing to buy your shares. If they do not want to or cannot accept your offer, ensure that you have an alternative buyer ready to help you get rid of your shares.
4. Ensure that your departure is officially recorded
After the terms of your departure has been approved, see to it that it is officially recorded. Check Companies House, especially if your company is regulated. See if it has been updated and ensure that it has been properly notified that you are no longer a director/shareholder of the company. This helps ensure that the liabilities or duties and responsibilities you have for the company will end with your exit.
Steps the Company should Take When a Shareholder Leaves
On the same token, the company must also do their part when a shareholder expresses their wish to leave. Because you cannot exactly predict what happens when a shareholder leaves a company, it is best to be prepared to ensure a smooth and hassle-free transition.
1. Ensure that your company has a share transfer agreement
Share transfer agreements set the procedure that the shareholders must follow when one of them expresses their intent to leave the company. It dictates who amongst the remaining shareholders can buy the stock of the outgoing shareholder or if the company itself must buy out the shares. It also determines how to measure the value of the shareholder’s ownership interest and details the payment terms for the share transfer.
Every company with multiple owners should have a share transfer agreement. Otherwise, disagreements could arise.
2. Follow share buyback procedures
If nobody wants to purchase the shares of the outgoing shareholder, the company can buy them instead. This procedure is called share buyback, and its rules are outlined in Part 18 of the Companies Act 2006. To ensure a successful share buyback, the following conditions must be met:
- A company must have at least one non-redeemable share;
- The shares to be sold should be fully paid; and
- The company should pay for the shares on purchase unless they are buying them as part of an employee share scheme.
3. Update your company’s share records
The company’s share records must also be updated to reflect that change in the list of shareholders and/or company leadership (if the shareholder is also a member of the board of directors). They should also notify Companies House of the shareholder’s departure.
Conclusion
Change is inevitable, especially in the world of business. Because you cannot predict who will remain with you until the end, it would be wise to be prepared for any eventualities. For instance, preparing a shareholders’ agreement or a buyout agreement is a great way to prepare for the future as it helps ensure a smoother transition when a shareholder leaves the company.
If you need help drafting a shareholders’ agreement, speak to BEB. We can write a shareholders’ agreement to suit your exact needs.