What happens to shares where a director is removed or resigns?

In many cases, a director is also a shareholder. If a director-shareholder refuses to sell their shares voluntarily, the company may need to explore whether the shares can be acquired compulsorily, subject to the relevant contractual provisions and any necessary shareholder approvals.

Can shareholders remove a director?

Generally, yes. The starting point is to review the company’s articles of association and any shareholders’ agreement. If these do not contain specific provisions governing removal, company law provides a procedure for removing a director, which we explain on our page about director removals.

A director may also be persuaded to resign voluntarily.

What if a director doesn’t want to sell their shares?

The starting point is to establish whether the company’s articles of association and/or shareholders’ agreement contain provisions addressing situations where the company wants to remove a director and ensure that they no longer hold shares. Without appropriate provisions, compelling a director to sell their shares can be difficult.

Review the company’s articles of association and any shareholders’ agreement. Do they contain provisions requiring shares to be compulsorily transferred when a specified event occurs? Standard model articles do not generally provide for compulsory share transfers simply because a director leaves office.

For example, bespoke articles or a shareholders’ agreement may require a shareholder to transfer their shares if the company is brought into disrepute or the shareholder becomes subject to a criminal investigation. Whether such provisions can be enforced will depend on their wording and the circumstances.

Can you force the sale of shares when a director resigns or is removed?

n private companies, the model articles do not generally require a director to transfer their shares when they cease to be a director or employee. Removing a director does not, by itself, give the company or the remaining shareholders the right to force a sale of their shares. Compulsory transfers generally require an appropriate provision in the articles or shareholders’ agreement, or the shareholder’s consent.

In deadlock situations, particularly where ownership and control are split equally between two shareholders, it may be possible to apply to the court for relief that results in one shareholder buying out the other. The court will consider the circumstances and the remedies available, and efforts to resolve the dispute, including through mediation, may be relevant. Court-ordered share transfers may be available in other circumstances, but the outcome depends on the legal basis of the claim and the court’s powers.

What are the options if a departing director agrees to sell shares?

If the director agrees to sell, there are several ways to structure the transaction. It is often sensible to agree the share transfer arrangements before the director resigns, as their continuing role may provide commercial leverage and the timing may have tax implications.

Options include:

• Transfer the shares to existing shareholders – this may affect the balance of ownership and control, so the consequences should be considered carefully.
• The company buys back and cancels the shares – this can preserve the relative ownership proportions of the remaining shareholders. A company share buyback may offer a tax-efficient outcome, depending on the circumstances and whether the relevant tax conditions are met. If the company cannot pay the full price immediately, it may be possible to structure the buyback with payments in stages, subject to the applicable legal requirements.
• Establish an employee benefit trust – the trust may be funded by the employer to acquire and hold shares for the benefit of employees.
• Buy back the shares and hold them in treasury – where legally available, the company may retain eligible shares in treasury pending a future sale.
• Restructure the business – a reorganisation may involve dividing the business into separate groups or entities and reallocating ownership. Some reorganisations may qualify for tax-neutral treatment, and HMRC clearance may be available in appropriate cases.

Negotiating exit with a shareholder director

In practice, negotiating an exit depends on commercial factors, including the value of the shares and the terms of any existing agreements. For example, if the departing director qualifies as a bad leaver following gross misconduct, the articles or shareholders’ agreement may provide for a discounted transfer price. The enforceability and effect of such provisions will depend on their precise wording and the circumstances.

Where no agreed valuation mechanism applies, the parties may need to negotiate the share price. This can be challenging in private companies, where there is no public market for the shares. An independent valuation may help resolve disagreements.

Well-drafted articles of association can anticipate the difficulties that arise when dealing with unwanted directors and shareholders. Clear provisions setting out the circumstances in which shares must be transferred, how the price is determined and how the transfer is completed can reduce uncertainty and help the company move forward.

How we can help

We advise directors and shareholders facing difficult disputes, as well as companies seeking to remove a director or address an unwanted shareholding. We can review existing agreements, assess the available options and help develop a strategy for resolving the situation.

You can reach us on 020 7438 1060.