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Options for Exiting a Shareholder in a Private Company and Dispute Prevention

Exiting a shareholder from a private company can be accomplished in various ways once agreed upon by the parties.

Firstly, the exiting shareholder's shares could be transferred to an existing shareholder, multiple shareholders, or a third party. Alternatively, the company could buy back the shareholder's shares. Each method has distinct tax implications, and the parties should seek advice accordingly.

After deciding on the exit structure, the exit arrangements should be thoroughly documented, including the payment terms for the shares, i.e., the price and payment method. Additional matters related to the shareholder's exit, like resignation as an officer or employee of the company, must also be addressed.

Compliance with the Corporations Act in regard to the exit is also crucial. For instance, if the company is buying back the shares, specific ASIC notifications must be submitted within defined timeframes before the buyback can be finalised.

However, forcing a shareholder's exit without their consent can be complex. Generally, there's no way to forcibly exit a shareholder from a company without their prior agreement, either through the terms of a constitution, a shareholders' agreement, or the rights linked to their share class. If no agreement is reached, the options could include checking whether the rights attached to the share class allow for company redemption or if outstanding capital to the company for their shares allows for share forfeiture. Another option could be if a pre-signed shareholder agreement or constitution enables forced exit under certain circumstances.

Common shareholder agreements often specify trigger events that allow a shareholder's shares to be bought by other shareholders or the company itself. These events could include the death or incapacity of the shareholder, their cessation of employment with the company, or any misconduct. Without such provisions, forcing a shareholder's exit can become difficult or impossible, potentially leading to lengthy, costly disputes, litigation, or even company winding up.

The best preventive measure against such disputes is a properly drafted shareholder agreement from the outset. This agreement can outline specific trigger events enabling other shareholders or the company to buy out a shareholder. Additionally, even if there's mutual agreement for a shareholder's exit, the shareholder agreement can determine the terms of the exit, including the payment for their shares and the payment method, limiting potential disputes.

If you have queries about preparing a shareholder agreement for a private company or options for exiting a shareholder from a private company, do not hesitate to contact our team. We're ready to assist you.

Contact us today to learn how we can assist you on your entrepreneurial journey. To get in touch you can connect with us on (03) 8691 3111 or send us an email at hello@alliedlegal.com.au

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