I am a director and am leaving my company. Do I have to sell my shares?

It often happens that, following a dispute, a director–shareholder leaves the company. A question often then arises as to whether that director should sell his shares.

Before you make this decision, the first place to look is in the company’s articles or any shareholders agreement. Sometimes these have clauses saying that, if a director resigns or is removed from office, then he must offer his shares for sale to the other shareholders. If this is the case, there is little you can do unless the other shareholders are not in a financial position to buy them.

If there is no clause similar to this, then you can keep your shares and there is no way the company can force you to sell them.

The real question is whether it would be better for you to sell your shares or not. This depends on many factors but, perhaps, the most important to take into account are the following.

Company Performance

The first thing to consider is how well the company is likely to do in the future. If the company is likely to improve, then the value of the shares are likely to rise. In such a situation, it makes sense to hold on to your shares for as long as possible.

On the other hand, it may be the case that the company has been doing well but you think its performance will slow down after you leave. If this is the case, you may be better off selling now rather than leaving it to deal with at a later stage when the price will be lower.

Dividends and Sale Proceeds

A minority shareholding does not give you control over a company. However, it does entitle you to a share of any dividends declared and a share of the sale price if the company is sold. Therefore, if you think that any of these are likely, then you may wish to hold on to your shares.

It might also be possible to agree to a price for your shares now plus a percentage of the sale price if the company is sold within a certain period of time.

One risk to bear in mind is that the directors may stop declaring dividends once you have left. Often this is done to prevent an outgoing shareholder from receiving a dividend. Sometimes this can be challenged in court if you can prove this was done in order to prejudice you as a shareholder. However, this may not always be easy as the company may have valid reasons for not declaring a dividend such as less profits being made or a need to retain profits for other purposes such as investments.

Control

Depending on how many shareholders there are and their respective voting power, you may wish to hold onto your shares to have some say in how the company is should be run in the future. Whether you can do this depends on the particular shareholders in a company. If there are two factions, for example, that are evenly matched, both sides may want your support in any contentious matter. However, other than this, it is unlikely that, with a minority shareholding, you can have much influence over how the company is run.

Competing with the Company

Another thing to bear in mind is that having a shareholding in the company does not prevent you from undertaking other activities such as starting a similar competing company. (There may however be other things that prevent you from doing this such as restrictive covenants in a service agreement.)

Deciding on a Price

If you decide to sell your shares, you and the company must then agree a price. Sometimes a mechanism is set out in the company’s Articles. If so, this usually involves a price being determined by the company’s accountant or an independent accountant if it cannot be agreed between you and the company.

One thing to take into account when valuing shares is that it is the shares that are being valued and not a percentage of the company. For example, if you hold say one-third of the shares in the company, this does not mean that the price for your shares should be one-third of the value of the company (depending on what the company’s articles say). The reason for this is that shares are valued on the basis of what someone would pay for them. It is likely that someone would pay much less for a minority shareholding, especially one that gives little control and is unlikely to pay dividends. It may therefore be a one-third shareholding is worth much less the one-third of the value of the company.

Negotiate

In practice, the price of your shares is usually determined through a process of negotiation. The company may well make accusations against how you performed your duties as a director simply so they end up paying a lesser amount.

Before you enter into any such negotiation, you must understand the strengths and weaknesses of points you can make during the negotiation and, for this reason, it is important to take legal advice at the outset.

Gary Cousins
Business Solicitor

For free advice on this topic please call us on 0845 003 5639.