Not all directors are also shareholders in their company. A shareholder is an owner of the company whereas a director is responsible for the management of the business activities. If you are both a director and a shareholder and you are resigning as director, you may be wondering if you have to sell your shares. How you deal with your shares once you resign will depend on your particular circumstances. This article will explain how to resign as a company director and deal with your shares when leaving the business.

How to Resign as a Company Director

The process of resigning as a company director is relatively similar to resigning from any other job position. 

If you want to resign as a company director, you need to sign, date and deliver a resignation letter to the company’s registered office. The company must also notify the Australian Securities and Investments Commission (ASIC) of your resignation.

Check your Shareholders Agreement 

When deciding what you should do with your shares after you resign as a director, the starting point should always be to look at your company’s shareholders agreement. The shareholder’s agreement will let you know if you can keep your shares after you resign, or if you must sell them back to the company or other shareholders.

In most situations, a director can keep their shares and just step back from their position. However, this is not always the case. 

For example, if you are a founder of your business but are stepping away entirely, and you have agreed to certain restrictions on your shares to help keep you involved in the business, resignation might trigger the need to sell your shares.

The shareholder’s agreement should also explain the process you must follow if you must sell back your shares. This will often include how you should deal with unvested shares if this is applicable to you. Generally, the standard position is that when you sell your shares, you must first offer them to existing shareholders before offering them to third parties.

What is a Trigger Event?

An event which triggers the sale of your shares is usually referred to as an event of default or a leaver event. The shareholders agreement may contain both good and bad leaver events. Bad leaver events usually involve an element of fault on behalf of the shareholder. 

For example, this could include: 

  • a breach of their employment agreement;
  • early resignation; or
  • stepping back from their involvement in the business entirely.

good leaver event is typically a situation where the shareholder stops providing services to the company for reasons outside of their control.

For example, this could include:

  • redundancy; or
  • illness.

The circumstances of your resignation may impact the price you have to sell your shares. 

For example, if you are forced to resign as a director because you have committed fraud, you may be considered a ‘bad leaver’ and need to sell your shares at a discount of their market value. 

In comparison, if your resignation is instead a good leaver event, you will likely be able to offer your shares for sale at their full market value.

Below outlines how the sale of your shares may occur in three different circumstances:

1. No Trigger Event in the Shareholders Agreement

If you resign as a director and your shareholders agreement does not specify that your resignation triggers an event of default, you do not have to sell your shares. 

Therefore, all you will need to do is update ASIC of your director’s resignation. You can continue to hold your shares and will have the same rights attached to them.

2. If Resignation Triggers an Event of Default

If you resign as a director and your resignation triggers an event of default or leaver event in the shareholders agreement, you will have to sell your shares in accordance with the sale process set out in the agreement. The standard position is that when an event of default has occurred, you must provide written notice of this as soon as possible. Once you have provided your notice, your shareholder rights and your role as a director are automatically suspended.

Your shareholder’s agreement will specify the way you must sell your shares. The sale of your shares may take the form of one or more of the following options:

  • you must sell your shares to a person or an entity nominated by the company;
  • the company will buy-back and cancel your shares; or
  • the company will follow the pre-emptive rights process and offer your shares to the other shareholders to purchase pro-rata.

3. You Resign and Want to Sell your Shares

If you check your shareholders agreement and there are no restrictions on what you can do with your shares once you step back from the company, you may decide to sell your shares. 

Here, you will simply need to follow the share sale or transfer process set out in the shareholder’s agreement.

Different Ways to Sell Your Shares

Company Buy Back

The company may elect to buy back your shares through a selective buy-back. This means that they are selecting to buy the specific amount of shares that you own. 

When the company buys back your shares, it will pay you for the shares, and your shares will be cancelled. The effect of a selective buy-back is that the amount of shares issued by the company is reduced and the relative ownership of each shareholder increases proportionately to their existing shareholding.

To conduct a selective buy-back, the company must:

  • obtain shareholder approval;
  • lodge the appropriate forms and documents with ASIC (and wait the prescribed time periods); and
  • enter into a buy-back agreement with you.

Usually, a company will buy back the shares from a shareholder for market value. This is unless its shareholders agreement or constitution provides otherwise. In some cases, a share buy-back may need to happen for a nominal amount of money.

For example, this may be where it relates to the buyback of unvested shares.

Pre-Emptive Rights Process

The requirement that you must first offer the shares you are selling to the existing shareholders is often referred to as the pre-emptive rights process. During this process, the other shareholders will be given a sale notice which includes: 

  • details of the number of shares you are selling; and
  • the price per share.

The other shareholders can opt to purchase their pro-rata allocation of the shares as well as more than this if there are shares leftover that have not been taken by other shareholders. 

To sell your shares to existing shareholders, you will need to enter into a share transfer form with each purchaser. Then, each purchaser will need to pay you the purchase amount. 

Once the sale has been completed, the company will need to:

  • update the member’s register;
  • cancel your share certificate;
  • issue a new share certificate to the purchaser; and
  • notify ASIC of the updated shareholding.

Sell your Shares to a Third Party

If the existing shareholders or the company do not wish to purchase your shares, you may be able to offer your shares to a third party. Some companies may set out in the shareholder’s agreement that if you would like to sell your shares to a third party, you must first get approval from the directors.

The process when selling your shares to a third party is similar to when you are selling shares to existing shareholders. Instead of a short share transfer form, which is suitable for existing shareholders, you may instead need a share sale agreement. This is a longer document containing more detail about the: 

  • shares;
  • sale process;
  • warranties.

The company will then need to:

  • have the incoming shareholder sign onto the shareholders agreement (if applicable). 
  • issue the third party with a share certificate for their shares;
  • cancel your share certificate;
  • update the company’s members register; and
  • update ASIC.

Summary of Possible Circumstances

Key Takeaways

If you plan to resign as a company director, but you also own company shares, you need to determine what you are required to do with your company shares. Your shareholder’s agreement will usually outline the process you need to follow when you are selling your shares. Once you have found a buyer for your shares you, or the company, should draft the relevant sale documents. The company should update its records and ASIC. If you have any questions about the share sale process, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Jessica Coventry
Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy