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Why Is It Important To Prepare For Shareholder Exits?

White 3D maze to show a complex exit

You might think that your shareholders will be around for the lifetime of the company. But have you considered some of the reasons your shareholders may leave and what will happen once they do?

There are a few reasons why your shareholders will leave the company, including:

  • Retirement
  • Personal bankruptcy
  • Disability
  • Termination of employment
  • Death

Your company may not be able to control these reasons, so you need to know how your company will be affected and what you can do to prepare for a shareholder exit.

What can happen after a shareholder exits?

In smaller companies, there are two main problems that shareholder exits can cause. These are: 

  1. The departing shareholder could leave a hole in the company’s leadership that any remaining shareholders may struggle to fill
  2. If there is no share transfer agreement in place, a disagreement may occur over the value of the exiting shareholder’s interest. If this happens, you may need to bring in a third party to conduct a business valuation to facilitate the sale of the shares.

Now we know why it’s important to prepare for shareholder exits, let’s look at what both the shareholder and the company should do.

What should shareholders do to prepare for exiting?

Business people gathered around a desk

While you might think that shareholders can just up and leave, there are a few things they will need to do to prepare first. Knowing these steps allows you to be prepared if a shareholder chooses to leave your company.

Notifying the board

The exiting shareholder must notify the board of directors, and any other shareholders, about their departure. When doing this, they will also need to state why they are leaving.

During this meeting, they will also need to say what they plan to do in the future. For example, if the exiting shareholder intends to set up a company or if they want to gain employment in another company, there may be legal ramifications. In these circumstances, legal advice should always be sought.

Make preparations

Check any shareholder’s agreement to determine whether the exiting shareholder can sell their shares and to whom.

During these preparations, any paperwork pertaining to the departure should also be filed.

Determine how the sale of shares can take place

Shareholders will need to determine their shares' value before they can sell them. This valuation can be determined through a formula, found in either the shareholder’s agreement or the Articles of Association.

During this process, the exiting shareholder may also become aware of any additional requirements, such as needing to offer the shares to fellow shareholders before selling to a third party.

Ensure their departure is officially recorded

After you have been notified of the departure, you will need to record it officially. It is the shareholder's responsibility to ensure this has been done.

What steps does the company need to take when a shareholder leaves?

Empty chairs around a desk in a boardroom

Now you know what the shareholder needs to do when they are preparing to leave the company, we can now move on to what you as a company need to do.

Make sure you have a share transfer agreement

Share transfer agreements come into play when a shareholder wants to leave the company.

It will set out whether any of the remaining shareholders can buy the shares or whether they will go directly to the company.

It also contains the value of the shares and the ownership interest.

This agreement will need to be in place before the shareholder’s exit to ensure it goes as smoothly as possible.

Follow any share buyback procedures

If none of the remaining shareholders are willing to buy the shares, the company must buy them. Several conditions need to be met before a buyback can take place:

  • A company must have at least one redeemable share
  • The shares need to be fully paid
  • The company will need to pay for the shares on purchase unless they are buying them as part of an employee share scheme

These conditions are set out in Part 18 of the Companies Act 2006, so they must be complied with.

Update the company’s share records

Your share records will need to be updated and reflect any changes with your shareholders.

Once this has been done, you will also need to update Companies House of the departure.

Summing up

While you might not think your shareholders will leave you, it’s always good to be prepared.

Knowing what your shareholders need to do and your obligations can make the process as smooth as possible.

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