When Shareholders don't see eye to eye - Issues for outgoing shareholders

We previously addressed issues surrounding shareholder break-ups from the perspective of those shareholders remaining with a company. On the flip side, while the same issues are often faced by outgoing shareholders, they arise in a different context.

Before instigating the exit process, an outgoing shareholder should:

• take preparatory steps to ensure that they know their rights and obligations

• anticipate future difficulties

• consider alternative strategies

As always, the first place to look is the written shareholders agreement if one exists. As previously mentioned, these agreements often provide for the parties’ rights and obligations about issues such as:

1. Restraints of trade imposed on outgoing shareholders;

2. Procedures on how shares are to be valued and transferred;

3. Time limits (often strict ones) which apply to valuations and transfers of shares;

4. Compulsory dispute procedures.

We find the most contentious issue facing exiting shareholders is the process of selling their shares. Most often, the shares are required to be offered to existing shareholders first, and the seller is locked into a compulsory valuation procedure from which they cannot resile. 

So, alternative strategies may need to be considered. 

Also, depending on the contents of the shareholders agreement, the shareholder may be required to factor in any debts they owe to the company (e.g. director or shareholder loans) into any sale price. 

Depending on the actual or potential animosity between shareholders, the exiting shareholder may be exposed to allegations of other claims e.g. breaches of restraint provisions, which may escalate a dispute to a mediation, arbitration or court proceedings. If not dealt with upfront, such actions can result in the party devoting significant time and incurring substantial legal fees in dealing with a dispute. 

It pays to consider your rights and potential points of exposure prior to enlivening an exit strategy. At Scoglio Law, we can assist shareholders in navigating the tricky areas to avoid unwanted outcomes and smooth out the process.