Shareholding director exits and the importance of the company’s constitution

Posted: Wednesday, 2 July 2014 @ 18:01

If you are a shareholding director and wish to leave your company, whether voluntarily or under pressure from your fellow shareholders, your main concern will be getting a fair price for your shares and other rights. This will usually be determined through negotiation and, before you embark on this, it is important to understand just how strong a position (or otherwise) you have. This will largely depend on what is set out in the company’s constitution.

The Company’s Constitution

A company’s constitution consists of the key documents that regulate the management of the company.

For most SMEs, it will consist of the following documents:

  • The Company’s Articles of Association;
  • Any Shareholders’ Agreement;
  • Any special resolutions passed by the shareholders;
  • Any agreements agreed to by all the shareholders.

What to look for

Together, the constitution documents set out how the company is to be run, procedures to follow in making decisions and the rights that the shareholders and directors enjoy.

You should look at all of these documents and consider how they apply in your particular situation. These will help you understand where your strengths and weaknesses lie in negotiating an exit.

Particular things to look for are as follows:

  • Whether you can be forced to sell your shares in certain circumstances.

    There will sometimes be clauses saying that, if you cease to be a director, then your shares must be transferred, usually to the remaining shareholders.

    This can be important if you are a director and a minority shareholder, as the other shareholders can always remove you as a director as long as the correct Companies Act procedure is followed. If this happens, then you will also be forced to sell your shares.

    If you have the right to retain your shares but resign as a director, as is often the case, then this can be a useful bargaining tool as you would still be entitled to receive dividends if they are declared, and have other rights depending on how many shares you hold and whether any decision-making powers are reserved for the shareholders to decide.

  • Whether certain powers are reserved to the shareholders

    The default position is that the directors of the company have the power to make decisions concerning way the company is run.

    The constitution will often reserve some of these decision-making powers to the shareholders. These will usually cover more important decisions, such as entering into high-value contracts, borrowing or lending money, or changing the share structure. The constitution may leave these decisions to be made by a simple majority of votes, or can say that a certain percentage is needed to make some decisions (e.g. 75% or 80%) or even that some decisions need to be unanimous.

    If the shareholders have these powers, this puts you in a stronger bargaining position as the other shareholders would be very keen for you to sell your shares, as well as just resign as a director, rather than having you possibly block decisions they want to make in the future.

  • Whether you can sell you shares and, if so, how.

    The default position is that you can sell your shares to anyone and for any price that you can agree. However, this is usually changed by the company’s constitution.

    Sometimes, the directors are given the power to block the registration of any share transfer. This means that you will not be able to sell your shares without the directors agreeing.

    Often there are a set of clauses dealing with what are called ‘pre-emption rights’. Basically, these set out a procedure for selling your shares and don’t allow you to just sell to anyone. Usually, the remaining shareholders will be given the first option to purchase your shares and these clauses will specify how the price is to be set if it cannot be agreed. If the other shareholders do not want to purchase your shares then, often you will be able to sell to a third party, but sometimes the directors are given the power to block this.

    How to use these clauses to your best advantage will depend on your particular circumstances.

What you should do

The constitution documents are complicated legal documents and are often difficult to understand. If you are unsure what they mean and how to use them to your best advantage, it is important to take legal advice.

We offer a service where we will examine these documents and advise you on your position. We will also discuss with you a strategy to follow when negotiating an exit from your company.

This may give you enough to negotiate with your fellow shareholders but we also can advise in the background during the negotiations on tactics to employ, or even conduct negotiations on your behalf.

The first thing to do is to get in touch with us so we can discuss how we can best help you.

Gary Cousins
Business Solicitor

Blog by Gary Cousins
Gary has been providing legal advice to shareholders, directors and business owners for over 25 years. Specialising in dispute resolution Gary is based in Birmingham with clients throughout the UK and overseas. View profile
Call Gary on +44 (0)121 778 3212 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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Thank you. Your response is great, very straight to the point! Hopefully this will bring an end to the matter. I will certainly be recommending your services as I am very impressed with the prompt dealing of this matter.
Janet Burbidge

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