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Exit as a Company Director

Thursday, February 15, 2018

It seemed like a good idea at the time


Perhaps it was a good idea at the very beginning of the enterprise.  The plan was fresh and the market looked ripe.  You and your colleagues entered into the business venture with high hopes of making a good return on your initial investment.  And… it worked. The business is thriving, cash-flow is good and the value of the business has vastly increased.  Now what?



Before you begin, plan how to end


Very few companies include an exit strategy in the initial business plan.  Very few people consult a dentist before tooth pain and very few people consult a lawyer before company pain.  This has become the reality of Benjamin Franklin’s axiom, ‘an ounce of prevention is worth a pound of cure’.


Once the business is rolling along, you may have the intention of taking an annuity payment as a royalty, or you – more likely – want to build the business then sell your share and move on to a new venture. However, you may be unable to if your initial plans and more importantly, the company’s constitution and shareholder agreement do not lay out a way for you to sell your equity in the enterprise.  Privately held companies inherently lack liquidity for the sale of shares.



Are you stuck with your shares?

Your shares represent the voting stock in the company’s decision making at shareholder meetings.  As a shareholder you have the right to deal with your shares (sell, trade or give away) according the terms of the shareholder agreement.  Lacking any specific terms in the shareholder agreement may mean that you cannot force the other shareholders to purchase your shares if you want to sell them. 
Lacking any terms to the contrary, implied in the right to deal with them is your right to sell them to any other party.  You can negotiate and sell your shares for the best price you can obtain.  Arranging a genuine sale to a third-party can also be a great negotiating tactic to sell them to the other shareholders so they do not have to deal with someone else, whom they may have disagreements with in the future.  This may lead to getting an even better price than you had bargain for with the third-party.



What about being stuck as a director?


Remember that being a shareholder is separate from being on the board of directors of the company.  You can be either or both, but generally directors (who make the decisions for the company) are also shareholders as the shareholders are the real owners. 


Directors have the burden of the responsibility for the proper governance of the company, particularly in regard to ensuring that the company is solvent while it is trading.  There can be serious civil penalties imposed on directors and it is essential that every director on the board is keeping up-to-date with the financial operation of the company. 


If you are not actually involved in the operation of the company to a level that allows you to stay current with that information, you may want to resign as a director to avoid any liability if you suspect there may be cash-flow issues.  Resigning is possible under the standard replaceable rules by giving notice in writing to the registered office of the company.  Resigning as a directory does not affect your share ownership, nor your rights to vote as a shareholder in the general meeting – the positions remain independent.



Where to from here


For a more thorough consideration of this complex area of law, or if you would like to know whether you should sell your shares, resign as a director or even force the dissolution of the company, make an appointment to speak with one of our experts about your position and rights.