If yes- don't read on…
In most small and medium businesses, some or all of the
directors are also the shareholders of the company. A point that is
often missed is that shareholding and directorship are two distinct
legal capacities with different rights and obligations attached to
each in law (see our
previous post).
Think of this scenario:
Two of you set up a company together and you work around the
clock. You both own 50% of company and you are both directors of
the company receiving an equal salary. Your co-shareholder (Gerard)
is married to an American who just had a fantastic offer to be a
Hedge Fund advisor in LA. After much deliberation they decided to
take the opportunity and make the move. Gerard has therefore
resigns from his director's role in the company, informing you he
will be leaving in 60 days.
Clearly Gerard will not be entitled to receive his salary after
resignation. Five years later you successfully manage to sell the
company for £3m, a great reward for all your hard work.
During these five years, unless stipulated otherwise in the
Articles or in the Shareholders Agreement, Gerard remains a 50%
shareholder in the company: he is entitled to vote, receive
dividends and receive 50% of the £3m sale proceeds!
Directors/shareholders of most small and medium businesses would
not be happy to have their business partner resign from their job
in the company but still be entitled to be a company
shareholder.
How to avoid such a scenario
It is quite astonishing how so many shareholders agreements I
see totally ignore this crucial point!
To avoid such position, it is import that your Shareholders
Agreement clearly stipulates that termination of directorship
triggers provisions dealing with the termination/ sale of the
resigning director's shareholding. The provisions need to stipulate
that if the relevant shareholder no longer operates as a director
for any reason whatsoever, then the termination of the Shareholders
Agreement will apply.
Good / Bad Leavers Provisions
You can also include "Bad Leaver"/"Good Leaver" provisions. In a
nutshell, these provisions stipulate that, on departure, the shares
of the departing shareholder will be bought by you/the company/ an
agreed 3rd party at market value, unless the relevant person is a
bad leaver. An extreme example would be, say, your co-shareholder
got caught with "her hand in the till". In such a case she would be
a bad leaver only entitled to the nominal value of her shares (e.g.
£1 each).
It is VERY difficult to get all these provisions in place once the
relevant shareholder decides to resign. Like always, there is no
time like the present!
For a free consultation on the above or any commercial matter,
please contact Penina Shepherd, our Company Commercial Solicitor on
(Switchboard) 08458 678 978 or via email to penina.shepherd@acumenbusinesslaw.co.uk