Selling Shares in a Company – As a Director

Selling shares in a company

It is quite common that after a disagreement, a director/shareholder will decide to leave their company. The question then comes up as to whether or not the director must sell their shares.

If you’re the director who is leaving you need to make this decision wisely. We have put together some areas that you will need to check and consider if you are planning on selling shares in a company.

Check the clauses

There might be a clause stipulating what a director must do upon his/her resignation or removal from office. If it says that you have to offer your shares for sale to other shareholders, then you must abide by this, however, if the other shareholders do not have the funds to buy them from you, you may have a way out.

If you do not find a clause addressing this issue, then it’s likely that you can just keep your shares. Unless stipulated otherwise, the company cannot force the sale.

What you do want to consider is what would be best for you. Is there an advantage to selling your shares now, or would you benefit by hanging onto them for the time being? In deciding this question you will want to consider some factors, the most important ones being:

Performance

The main thing you want to think about is company performance. Ask how well it is likely to perform down the road. If all indicators point to improvement, then it’s likely that the share price will go up. In this situation it would make sense to keep your shares for the long term.

Or if it seems like the company has been performing well but it’s likely to taper off once you’re gone, then it might be in your best interest to sell your shares now instead of waiting for the share price to go down.

Sale proceeds & dividends

If you are a minority shareholder you have little control over the company. But you are entitled to a share of dividends and if the company is sold, a share of the proceeds of the sale. If you envision any of these scenarios happening, then it may make sense to keep your shares for the time being.

You might also consider making an agreement to sell your shares at a certain price now plus you would receive a certain percentage when the company is sold, if that happens within a certain timeframe.

There is a risk that you should be aware of in that directors have the power to stop declaring dividends. They could do this upon your leaving to prevent you from getting a dividend.

You can sometimes challenge this in a court of law, but you would need to be able to prove they did this for that reason. This isn’t easy since the company could have other reasons not to declare a dividend, like lower profits, or the need to make capital improvements.

Voting power

You might want to keep your shares in order to have a say in how the company is run down the road. Depending on the number of shareholders and the voting power they represent, this might be in your best interests. Whether or not this makes sense depends on the shareholders and what factions may exist.

For example, if there are two distinct factions, evenly matched, either side might want you to support them in some dispute in the future. But if this were not the case, you being a minority shareholder would have little influence over matters involving the running of the company.

Competing

Another thing you may want to consider is that having shares in a company doesn’t keep you from getting involved in other things, like owning a similar company that could be a competitor. But before you start or buy a similar company make sure that you do not have a non-compete agreement or any other restrictive covenants that you must abide by.

Setting a price

If you make the decision to sell, both you and the company have to set a price that’s agreeable to both. There might be a mechanism in place spelled out in the company Articles. If this is the case it will probably state that the company accountant or another independent accountant will determine the sale price if you and the company cannot come up with a number you agree on.

Don’t forget that when putting a value on your shares, it is the shares and only the shares that you are valuing, not your percentage of ownership in the company. What this means is that if you hold one-fourth of the shares, this does not translate into you owning one-fourth of the total value of this company. For clarity on this you need to check the company Articles.

The rationale is that the value of shares comes from what someone will pay for them. For a minority shareholding, someone would more than likely pay a lot less; especially since there would be so little voting power and it isn’t likely there would be dividends. Therefore a one-fourth shareholding is actually worth a lot less than one-fourth of what the company is worth.

Negotiate your price

In reality, your share price is probably going to be determined by negotiation. The company might accuse you of poor performance with regard to your duties as director just so they don’t have to pay as much for your shares.

Before you even start negotiating, you must determine what strengths you have and any weaknesses. You must also look at their strong and weak points. This is why seeking the advice of a professional is a good idea at the outset. You do not want to be blindsided by something and give up too much in the negotiations.