Getting out of a shareholders agreement can be tricky and often leads to costly disputes.
At LegalVision one of the most common questions we get from our clients is how they can exit a shareholders agreement without grief.
Read your agreement!
You really need to read your agreement closely to see what you need to do.
Remember that a shareholders agreement is really just a contract and you agreed to its terms – terms which are set out in the agreement.
In many cases a shareholder gets into trouble when they are trying to dispose of their shares for not following the rules they agreed to follow when signing the shareholders agreement.
There are some key provisions in virtually all shareholders agreements which you will need to follow when trying to exit the agreement.
Right of refusal/ offer:
These are the most common and basic of pre-emption clauses – it means that if you want to sell your shares you first must offer to sell them to the other shareholders. These clauses give existing shareholders certain rights ahead of third-party purchasers.
In the case of a right of first refusal offer, the person wanting to sell their shares must make the first offer to the existing shareholder(s), if the existing shareholders decline – then the person wanting to sell their shares can sell to a third party for that same price for a specified period of time.
A right of refusal is similar, but is triggered when an existing shareholder is given a bona fide offer to purchase their shares from a third party; the shareholder offered a price must first see if the existing shareholders want to buy it for the same or similar price.
Put/ call option:
This clause can require other shareholders to sell their shares to other shareholders (‘the call option’) or to purchase other shareholders’ shares (‘the put option’).
Usually the shareholder agreement will specify that shares must be transferred in certain situations – such as insolvency or a breach.
If you want to get out of a shareholder agreement then you need to read the Put/Call Option closely – in many shareholder agreements the ‘call option’ means the shares have to be sold for a certain price, while the purchase options might involve discounts for existing shareholders.
Also referred to as a buy-sell clause; a shotgun clause means that if a shareholder or shareholders offer to buy out the business at a specific price – then the other shareholder or shareholders must accept the buy out offer or buy out the shareholder who made the offer at the same price.
In reality a shotgun clause usually favours the party who is better resourced financially.
Restrictions on transfer:
Most shareholders agreements have restrictions on transferring shares to a third party for a certain period of time. Usually after this period expires you will need to comply with put/call options.
Drag along and tag along rights:
A tag-along right is a right for a party to sell their shares when the other party sells theirs shares (so you can ‘tag-along’ with another shareholder when they sell theirs).
Drag along rights is when the selling party also has the option to actually force the other party to sell when they sell theirs.
If you run into further trouble, then please contact a lawyer at LegalVision.
About the Author
Luke Williams is a lawyer at LegalVision and an ex-journo.