It Depends – Can I exit a shareholder of a private company?

In this edition of ‘It depends’, senior associate Keeghan Silcock talks about whether you can exit a shareholder from a private company and what steps you can take to protect against a dispute.

Video transcript

Hi and welcome to another edition of it Depends. Today I’ll be talking about whether you can exit a shareholder from a private company.

How can the parties agree on a shareholder’s exit?

So, there are a number of ways that the parties can agree on the way that a shareholder is exited from a company. The first way would be to just transfer that shareholder’s shares to either an existing shareholder, one or more existing shareholders in a company, or a third party. Another option would be for the company itself to buy back that shareholder’s shares and the party should seek advice about the tax implications of each of these options at the time because they do differ. Once the parties are set on the way that the exit will be structured, the exit arrangements should be properly documented and in particular the payment terms for that shareholder’s shares. That includes the price being paid and how that price is payable. Any other ancillary issues that are attached to that shareholders exit, for example, the resignation as an officer of the company or as an employee should also be dealt with. And then we need to be confident that we’re also dealing with any Corporations Act requirements in respect of that exit. So, for example, if the shares are being bought back by the company, there are very strict ASIC notifications which have to be made within particular time frames before the buyback of those shares can be completed.

Can I force the exit of a shareholder without their agreement?

Where we have a situation where the parties aren’t in agreement as to whether a shareholder should be exited or how that shareholder should exit, it becomes very difficult for a resolution to be reached. This is because the starting point is that there isn’t any way to forcibly exit a shareholder from a company without their agreement either previously, in respect of the terms of a constitution or shareholders agreement, or the rights attaching to their class of shares or now when we’re looking at how they’re exited. So, if they don’t agree that the types of things that we would look at as options to see whether they can still be exited would be, number one, whether the rights attaching to that class of shares allow for those shares to potentially be redeemed by the company. That’s not going to help if the shares held up ordinary shares with normal voting rights that just aren’t redeemable. Another potential option could be if the capital owing the company for their shares hasn’t been paid and the Constitution or shareholder agreement allows for shares to be forfeited in those circumstances. Or if we’re really lucky, we’ve got a shareholder agreement or constitution in place that’s been signed by the parties previously, which allows for a shareholder to be forcibly exited in certain circumstances. So, it’s pretty common for a shareholder agreement, for example, to specify certain trigger events which would allow for a shareholder’s shares to be either bought by the other shareholders or the company itself, if a particular trigger event happened. So, for example, that trigger event could be the death or incapacity of the shareholder or the key controller, or if they cease employment with the company or if any other type of misconduct arises on the part of that shareholder. If none of those options are available and in particular, we don’t have a shareholder agreement which provides for those forceful for exits, then it becomes very difficult, if not impossible, to force a shareholder’s exit from a private company without their agreement. This could really result in a protracted and costly dispute between the parties, which could ultimately end up in litigation and potentially, worst case scenario, an application to the court for the winding up of the company.

What steps can I take to protect against a dispute?

The best measure for protecting against a dispute between shareholders about any future exit of a party is to put in place a properly prepared shareholder agreement from the outset. As I mentioned before, the shareholder agreement can specify particular trigger events which would give the other shareholders or the company itself a right to buy out a shareholder if they occur. Also, even if there is an agreement that a shareholder needs to exit a company, the shareholder agreement can specify the terms of the party’s exit. So, how much they’re going to get paid for their shares and how that payment is going to be made. So, that reduces the scope for dispute in those circumstances as well. If you have any questions about preparing a shareholder agreement for a private company or options available for exiting a shareholder from a private company, please feel free to get in touch with a member of our team and we’d be happy to help.