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How to Exit a Shareholder and Prevent Conflict

26 July 2023

The COVID-19 pandemic and Brexit have presented numerous challenges for businesses, leading to boardroom disputes over strategic direction, supply chain disruptions and financial uncertainty. With boardroom disputes becoming more and more common, the importance of having a well drafted Shareholders Agreement, and the potential fall-out from a poorly drafted or out of date Agreement something we are regularly involved in.

Shareholders Agreements help protect the rights and interests of all shareholders and outline the governance structure of a company, including how decisions are made and voting rights. They also provide protection for minority shareholders, such as veto rights on key decisions, pre-emptive rights to purchase additional shares, and anti-dilution provisions. Most importantly, they should include provisions regarding the transfer of shares and how to manage the exit of a shareholder. This can include restrictions on the transfer of shares to outsiders or competitors, rights of first refusal for existing shareholders, and mechanisms for valuing shares during a sale or exit event. These provisions help maintain control and stability and prevent unwanted transfers of shares.

Conflict

It is inevitable that within any organisation there will be potential for conflict. Where conflict arises and cannot be resolved, organisations will often look to exit a shareholder who is causing disruption. An issue we are seeing more frequently, is where a Shareholder Agreement has share transfer provisions, but in the wrong company.

For many companies, the same Directors and Shareholders will hold a number of interests in Holding Companies and Trading Companies of the same Group. Where this is the case, Directors (who are also employees) will have a Service Agreement or an Employment Contract with one company but may hold shares in other associated companies. This often happens following expansion of a business.

In this scenario, it is essential that the Shareholders Agreement reflects what happens with Directorships and Shareholding across the group, if employment with one Trading Company ends. If you have not reviewed your Shareholders Agreement, then get in touch as we would be happy to review them for free and let you know our thoughts on them. There is no compulsory provision for the transfer of shares in Companies of the Group in which they were not directly employed, but Shareholding and Directorships exist. This creates a situation where an aggrieved shareholder whose employment has terminated still retains a shareholding, right to dividends and voting rights with a Group Company or Companies.

So, what can be done in this situation? There are various options:

1. Negotiate with the outgoing employee for sale of shares and resignation as director

2. Amend Articles of Association

3. Liquidate the Holding Company/Trading Company

4. Keep the employee as a shareholder in the Holding Company/Trading Companies

Before you start down any route, it’s wise to obtain legal advice as they can be complicated and costly. Avoiding finding yourself in that position is the best place to be and that can be achieved by having properly drafted and effective Shareholders Agreements in place in the first instance. Companies should also routinely review their Shareholders Agreements to make sure they accurately reflect the intentions of an evolving Company and provide adequate protection for business owners and Directors, particularly in the event that a fellow Director and shareholder needs to be removed. It is essential that Companies take legal advice on the drafting of Shareholders Agreements from the outset, to ensure that they do not come unstuck further down the line.

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