Running a private company means planning for change – and one of the biggest changes is a shareholder leaving.
Sometimes a shareholder wants to go. Sometimes the company needs them to go. Either way, it can get messy without a plan in place.
That’s where a good exit clause in a shareholders’ agreement comes in. It sets out the rules in advance, so everyone knows what happens when someone leaves.
What is an Exit Clause in a Shareholders’ Agreement?
An exit clause is a section of a shareholders’ agreement that explains how a shareholder can leave the company – whether by choice, by force, or through a buyout – and what steps need to happen along the way.
What Are Your Options When a Shareholder Leaves?
There’s more than one way to handle a shareholder’s exit. The right choice usually depends on your company’s structure and the shareholder’s situation. Whatever path you choose, it should line up with your shareholders agreement – this document usually sets out the exact rights and steps that apply.
Share Transfer
The simplest option is a share transfer. The exiting shareholder sells their shares – either to another current shareholder, or to a new investor. The company keeps running with its ownership structure intact.
A few things to keep in mind:
- The other shareholders usually need to agree to the transfer.
- Both sides need to think about tax, including capital gains tax.
- The company may need to approve the transfer under its constitution or shareholders’ agreement.
Buyback of Shares
Instead of a transfer, the company itself can buy back the exiting shareholder’s shares. This removes them from the company altogether and gives the company more control over who owns what.
A few things to keep in mind:
- The company needs enough cash to actually afford the buyback.
- Shareholders may need to approve it, depending on the constitution or agreement.
- The company must lodge the required notifications with ASIC within the set timeframes.
Documenting Payment Terms
Whichever option you choose, write everything down clearly – the share price and exactly how and when payment will happen. This avoids confusion later.
A few things to keep in mind:
- Spell out whether it’s a lump sum or paid in stages.
- Think through any tax that might apply to the payment.
Can You Force a Shareholder to Exit?
Sometimes a shareholder won’t leave willingly. So can you force them out?
Generally, no – not unless specific conditions already exist in the company’s constitution, the shareholders’ agreement, or the rights attached to their shares. This is exactly why a well-drafted exit clause matters. It can build in mechanisms for a compulsory transfer, a buyout, or another exit path, triggered by specific events.
Conditions for Forcing an Exit
Forcing an exit needs clear, predefined conditions – usually written into the company’s governing documents. These might cover things like misconduct, incapacity, or breaching the agreement.
Redemption of Shares
If the shareholder’s class of shares allows it, the company can redeem those shares. This needs a careful check of the company’s constitutional documents to make sure it’s done correctly.
Forfeiture of Shares
If a shareholder hasn’t fully paid for their shares, and the constitution or agreement allows it, the company can forfeit those shares. This needs to be handled carefully to avoid a dispute.
Trigger Events in Shareholder Agreements
A strong shareholders’ agreement can list specific “trigger events” that allow a forced exit. Common examples include:
- the shareholder’s death or incapacity
- their employment with the company ending
- a breach of fiduciary duties, or other misconduct
Without clearly defined trigger events, trying to force someone out can lead to long, expensive disputes – and in some cases, even risk winding up the company. If a shareholder believes they’re being treated unfairly during this process, they may also have a claim for oppressive conduct under the Corporations Act, so getting the process right matters for both sides.
How to Prevent Disputes When a Shareholder Leaves
The best way to avoid a messy exit is to have a clear, well-written shareholders agreement from the start.
Key Provisions in a Shareholders Agreement
A good agreement should spell out how exits work – when shares can be transferred, redeemed or forfeited, how they’ll be valued, and how payment happens. Look for:
- a clear definition of “trigger events”
- rules for share transfers or buybacks
- a method for valuing the shares
- clear payment structures
- a process for resolving disputes
Dispute Resolution Clauses
Adding a dispute resolution clause can save you from expensive court battles. It lets shareholders sort out disagreements through mediation or arbitration instead – usually faster, and far less costly.
Frequently Asked Questions
1. What is an exit clause in a shareholders’ agreement?
It’s the section of the agreement that sets out how a shareholder can leave the company, whether that’s by choice, by force, or through a buyout, and what steps need to happen.
2. Can a company force a shareholder to leave?
Generally, only if the constitution, shareholders agreement, or share rights already allow it, usually through defined trigger events like misconduct or a breach of the agreement.
3. What’s the difference between a share transfer and a buyback?
A transfer moves the shares to another shareholder or investor. A buyback means the company itself purchases the shares back, removing them from circulation.
4. Does a share buyback need ASIC approval?
It generally needs the right shareholder approvals under the company’s constitution, plus the required ASIC notifications lodged within set timeframes.
5. What happens if there’s no shareholders agreement in place?
Without one, a shareholder exit – especially a forced one – can turn into a long and costly dispute, since there’s no agreed process to fall back on.
Key Takeaway: Plan Ahead for a Smooth Shareholder Exit
Planning for shareholder exits early protects your company’s stability later.
Choosing the right exit strategy, documenting it properly, and building a solid exit clause into your shareholders’ agreement all help you avoid disruption, give everyone clarity, and steer clear of costly disputes.
If you’re not sure how to structure your shareholders’ agreement, or you’re already facing a shareholder exit, it’s worth getting advice from a commercial lawyer early – before things get complicated.
Contact Us Today
Need help with shareholders agreements or managing a shareholder exit? Allied Legal is here to help.
Phone: (03) 8691 3111 · Email: hello@alliedlegal.com.au
Related reading: Why Do I Need a Shareholders Agreement? · Mastering the 50/50 Split: Resolving Shareholder Disputes · Company Constitution & Replaceable Rules Explained
This article is for general information only and doesn’t constitute legal advice. You should obtain advice specific to your circumstances before acting on anything discussed here.
