In the lifecycle of any business, change is inevitable. Whether due to market shifts, evolving personal circumstances, or strategic realignment, the need for shareholders to exit a business can arise unexpectedly. Without a clear and agreed-upon exit strategy, such transitions can lead to disputes, disruption, and loss of value.
A well-drafted and clear shareholders’ agreement, while not mandatory, is a critical tool for managing shareholder relationships and ensuring alignment on key business decisions, including how and when shareholders may exit the business.
The Importance of an Exit Strategy
An exit strategy provides clarity and structure around the departure of shareholders. It helps to:
- Minimise the risk of disputes and deadlock
- Ensure fair treatment of all shareholders
- Preserve business continuity and reputation
By addressing exit mechanisms early, businesses can avoid reactive decision-making during periods of stress or conflict.
Key Elements to Consider in a Shareholders’ Agreement
A tailored shareholders’ agreement should address the following components to support a robust exit strategy:
- Business Plan and Budget
Establishes the commercial objectives and financial framework, providing a reference point for performance and strategic direction.
- Dispute Resolution Procedures
Sets out clear processes for resolving disagreements, such as mediation or arbitration, to avoid litigation and maintain business stability.
- Shareholder Restraints
Includes non-compete, non-solicitation, and confidentiality clauses to protect the business from unfair competition or misuse of sensitive information. These must be reasonable and enforceable under applicable law.
- Reserved Matters
Identifies decisions that require special majority or unanimous shareholder approval, such as issuing new shares, entering into major contracts, or selling the business.
- Share Transfer Provisions
Provides mechanisms for the transfer of shares, including:
- Pre-emptive rights: allowing existing shareholders the first opportunity to purchase shares.
- Buy-back or capital reduction options: enabling the company to repurchase shares from a departing shareholder under agreed terms.
- Valuation methodology: using agreed accounting principles to determine fair value.
- Drag-along and tag-along rights: protecting both majority and minority shareholders in sale scenarios.
- Voluntary liquidation: outlining the process for winding up the business if agreed by shareholders.
Next Steps
Shareholders should regularly review their governance documents to ensure they remain fit for purpose. If your company does not yet have a shareholders’ agreement, or if your existing agreement does not adequately address exit strategies, now is the time to act.
Our team can assist with:
- Drafting or updating Shareholders’ Agreements
- Advising on appropriate exit mechanisms tailored to your business structure
- Ensuring compliance with relevant corporate laws
For tailored advice on drafting or reviewing your shareholders’ agreement, please contact Lisa Johnston (lisa@morganenglish.com.au) and our Corporate + Commercial Team at Morgan + English today.
