A shareholder may seek to exit your company for personal, financial, or strategic reasons. For example, retirement, or to realise the value of their shareholding, or potentially due to relationship breakdowns and disagreements over the company's direction.
As a business owner, it is essential you obtain professional advice on a shareholder exit scenario to ensure it is correctly managed and effected, to avoid this disrupting your company's operations and to protect your business going forward.
Our Corporate and Commercial team at Trowers have extensive experience in this area and have outlined below some key considerations and possible pitfalls to avoid.
Types of shareholder exit
Shareholder exits typically take one of two forms, although more complex transaction structures can apply:
- Share transfer: one or more continuing shareholder's purchase the departing shareholder's shares.
- Share buyback: the company purchases the departing shareholder's shares, subject to strict legal requirements under UK company law. The departing shareholder's shares are usually cancelled.
Which form of shareholder exit is best for my business?
Underlying accounting and tax reasons often inform the preferred structure of a shareholder exit arrangement. This includes whether the company has sufficient distributable reserves (or capital) for a share buyback. Your lawyers will work closely with your accountant to ensure the appropriate accounting and tax requirements are incorporated into the exit documentation.
It is also essential to consider the possible employment law implications of a shareholder exit event. (Trowers have excellent employment specialists who regularly advise in this area). Equally, if your shareholder exit scenario involves contentious disputes our highly skilled commercial litigation lawyers can assist you to put in place a watertight settlement agreement to protect your business.
Share transfers and buybacks
Notable distinctions between share transfers and buybacks include:
- Who funds the purchase: individual shareholders fund a share purchase/transfer whereas the company uses its own resources for a share buyback. An important consideration is whether the company has sufficient cash or capital for a buyback and whether a buyback will impact the business' operations or growth plans.
- Treatment of shares following purchase: unlike a share transfer (where shares change hands), a buyback typically involves the cancellation of the departing shareholder's shares. This changes the shareholding percentages of the remaining shareholders and consideration should be given to the impact this has on the company's articles of association and/or shareholders' agreement (on areas such as decision making).
- Payment structure: shareholder(s) may agree to buy the departing shareholders' shares with payments made over time rather than in full at the point of exit. Share buybacks must be paid in full at completion, though shares can be bought back and cancelled in stages for a phased exit.
- Legal paperwork: shareholder exits need precise documentation that varies depending on how the shareholder leaves. We can prepare the necessary documents containing appropriate board and shareholder approvals to ensure compliance with UK company law and your company's corporate governance and to protect your business – not doing this correctly may also cause future problems and delays if the company was to be sold or receive investment (as an example, share buybacks are void if they do not follow a strict legal procedure).
The need for expert advice
Shareholder exits vary in complexity and have significant legal, tax, and commercial implications that require careful navigation to protect your business interests.
Shareholder exits vary in complexity and have significant legal, tax, and commercial implications that require careful navigation to protect your business interests.
If you are facing a shareholder exit scenario or would like to discuss how we can assist you and your business, please get in touch.
