Shexit - Clean Shareholder Exit

Want "out" of a business?  Shareholders can’t or won’t agree?  Stuck, unable to move forward?  Business going down?  High stress, affecting health and relationships?  

Here’s the answer.  A quick, neat process.

Toss a Coin, Better than Court

You could pursue Court proceedings, for example company wind-up and/or a shareholder oppression proceedings.  But why waste time and money and invite stress, especially when you can't be sure what you'll get?

Stay out of Court whenever possible.

50 Ways to Leave, Let me Count

An out-of-Court agreement is almost invariably the best course.  There are other options, but the agreed outcomes often involve the following:

• One or more shareholders stay, and one or more shareholders exit: Those who stay buy out the leavers for an agreed price.
• One or more shareholders sell their shares to a new party approved by the other shareholders.
• The business is split up between the shareholders.
• The shareholders agree to sell the business (or company), and the net proceeds are divvied up between them.
• Appoint a liquidator by shareholder special resolution to wind up the company (solvent/voluntary members company wind-up) (e.g. negotiate a release from the Lease, let staff go, sell the company's assets, collect debts, pay debts, finalise all outstanding matters, divvy up the net proceeds between the shareholders and de-register the company). 

(NOTE: When shareholders aren't getting along it's sometimes difficult to sell the business or company.  If the company is wound up by a liquidator, the liquidator's fees are likely to be significant).

20 / 20  Hindsight

The best approach is of course for the parties to agree upfront (e.g. in a Shareholders Agreement, aka “Company Pre-nup”), before going into business together, on what happens if there is a deadlock between them, or if one or more of them wants out. At the start there is generally much goodwill and trust, and no disagreement, and the parties are more likely to be cool-headed and rational (but often overly optimistic):  Each party could be on either side of any agreed exit arrangements, and is therefore apt to take a more fair and even-handed approach.

Ex Post Facto

What if the parties have not entered into a Shareholders Agreement dealing with these matters?  No problem.  Just enter into one now (a “Post-nup”).

Comprehensive Post-nup

If the parties intend to continue in business together, the Shareholders Agreement could be a comprehensive one, dealing with a wide variety of issues in addition to exit, such as dividend distribution, the delegation or allocation of decision-making powers, “drag along” and “tag along” rights, key decisions requiring super majority approval, appointment of chairperson (and giving them a casting vote), the right to appoint directors, insurance etc.

Exit Only Post-nup

If the parties want, they can enter into a Shareholders Agreement that deals only with shareholder disputes, deadlocks and exit.  This might make some sense where there is a shareholder deadlock.

Example of Shexit Process

A shareholder exit process needs to be tailored to the specific circumstances in each case and needs to be agreed by all parties, but this is an example of how "Shexit" might work, broadly, if there is a shareholder buy-out, i.e. where one or more shareholders stay, one or more shareholders exit; and those who stay buy out the leavers for an agreed price.

• The parties agree on the terms of a share sale.  Any party could end up being a buyer or a seller, so the parties would tend to keep the terms fair and balanced.
• The parties agree on the process for deciding who buys, who sells, what the price will be (or how it will be determined), and when payment will be made.  (Payment over time by instalments is an option to consider).
• The agreement reached by the parties would then be set out in an "Exit Only" Shareholders Agreement.
• The parties sign the Shareholders Agreement and where appropriate also sign resolutions, director resignations, share transfers and other transaction documentation (all permutations), and provide the documentation to a facilitator.
• A meeting is held, the agreed process is followed, and an outcome is achieved.
• The relevant change notices are lodged with ASIC, at or shortly after the meeting, to give effect to the outcome.  (This can be done by the company secretary with the express authorisation and direction of the parties).  The resolutions, resignations and transaction documents are handed to the continuing party(ies).

Who Goes There

So how do you decide who goes?  Toss a coin?  If you like.  Another option could be to have a sealed-bid auction (often a good option, depending on the circumstances) or other "Russian Roulette" -style process, which determine who goes, and also at what price.  Yet another option might be for the question of who goes to be decided by a majority vote.

Redemption

The price can be determined under a sealed-bid auction (or other "Russian Roulette" -style process).  Another option for determining price could be to arrange a valuation by an agreed valuer (but bear in mind that valuations take time, cost money, involve subjectivity, and give room and time for the deal to fall apart).  Or the price can be pre-agreed (on a per-share basis) (i.e. agreed before it has been determined who goes and who stays). 

Three's a Crowd

Of course it's a lot simpler if there are only two shareholders.  However, if there are more than two shareholders it is still doable with some creative thinking.  For example:

• If there are two factions, each could bid to buy the other out in a sealed-bid auction. 
• Each could put in a sealed bid to buy out all of the others at a nominated price per share, (and the highest bid wins).
• All could vote as to which of the others should leave, and if a majority (over 50%) is achieved in relation to a party, then the others must buy that party out, perhaps at a price per share determined by a valuer (before or after the process), or at a pre-agreed price. 
• Each could offer to sell to the others (pro rata to their shareholdings), and the lowest offer wins, and the winning offeror can force the others to buy him/her out at that price. 
• A party can be given the right to nominate a price per share, and to force the others to choose either to buy him/her out at that price, or to sell to him/her at that price.

The Die is Cast, Cold Feet

Ideally all required resolutions, transfer documents and resignations (for all permutations) should be signed by all parties before the “die is cast”, so that the process and transactions can be implemented even if one or more parties subsequently gets “buyer’s (or seller’s) remorse” and withholds cooperation.

Facilitator

It is advisable that all parties engage a suitably experienced lawyer (or other person) to facilitate this type of process.  We can fill this role, and be engaged by all shareholders, or we can be engaged by one or some of the parties to set up the process for them and/or provide related advice.  If the parties are struggling to agree on a process, Rod could assist as mediator.  (He could also provide mediation services in relation to the deadlock generally, and help the parties explore options for a way forward).

Documentation

The process needs to be well documented, and again we can assist in preparing this.

Next Steps

If you would like our assistance, please email us:

• The Shareholders Agreement (if there is one - let us know if there isn't).
• The name of the company(ies) involved.
• The Constitution(s) of the company(ies) involved.
• Your telephone number.

We will then give you a call to discuss the matter in general terms (on a complimentary basis). However, before going into any detail with any of the parties, we will need to establish who we would be acting for, and in what capacity.

Contact

If you are interested in using our “Shexit” Shareholder Dispute Resolution Mechanism, or would like us to provide legal or mediation services, please contact Rod Stumbles here, by replying to this email, or by telephoning him at +613 8692 7255. 

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Stumbles & Co:

A leal practice based in Melbourne, Australia,  provides two types of services: Legal and Mediation.

The legal practice gives legal advice on Australian law and deals with contracts, transactions and other matters relating to business in Australia.  However, no geographical restriction applies to the mediation practice, which can provide mediation services to parties worldwide, including online.