Exit of a shareholder; the options

Conflicts between shareholders within a private limited company are common. Often, the exit of one or more shareholders is the only way to guarantee the company’s continued existence. An exit arrangement, such as an expulsion or withdrawal arrangement, can prevent even greater damage.

Legal arrangements

We recently wrote about a number of non-legal exit arrangements, namely “Russian roulette”, the “Texas shoot-out” and the “Dutch auction”. However, there are also statutory arrangements for situations not covered by the articles of association or shareholders’ agreement solicitor, which can put an end to a conflict between shareholders. Both claims must be brought before the court.

The expulsion arrangement

The expulsion arrangement allows shareholders to force a co-shareholder to transfer their shares to them and expel that shareholder from the company. This is only possible if the shareholder is harming the interests of the company and the continuation of their shareholding cannot reasonably be tolerated. Shareholders who together hold at least one third of the shares in the company can demand this.

The exit arrangement

Under the exit arrangement, a shareholder who wishes to withdraw can oblige the co-shareholders to take over his shares. This is only possible if his rights and interests have been harmed by one or more co-shareholders to such an extent that his continued shareholding can no longer reasonably be expected. Unlike the expulsion scheme, the interests of the company are not paramount here, but rather the interests of the shareholder himself.

The procedure

In both cases, the court assesses whether the requirements for expulsion or withdrawal have been met and whether the claim can be granted. If so, the court appoints one or more experts to determine the value of the shares. The court ultimately sets the price of the shares on the basis of the experts’ report. The shareholder to be expelled must then deliver his shares to his co-shareholder(s) within two weeks. The claimant shareholders must then pay for the shares immediately. In the withdrawal procedure, the defendant shareholders are obliged to take over the shares of the withdrawing shareholder and pay him the price determined by the court.

There are various options for shareholders to divest themselves of each other (exit of a shareholder), both statutory and non-statutory arrangements. If you have an irresolvable conflict with your co-shareholder(s) and you want to end it quickly and effectively, or if you would like advice on the best arrangement for your situation, please feel free to contact our solicitors.