Exiting Shareholders of a Private Company: Share Sale vs Share Buy-Back

In Short

• As an exiting shareholder, you can sell your shares to fellow shareholders or participate in a company buy-back.
• Selling your shares involves tax consequences, and prices must align with market value.
• A share buy-back requires the company to follow strict processes, including board resolutions and ASIC approvals.

Tips for Businesses

Ensure clear agreements are in place for share transactions, including pre-emptive rights and valuation methods. If buying back shares, follow the necessary legal steps, including ASIC submissions and proper documentation. Seek legal, financial, and tax advice to navigate potential pitfalls in the process.

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Table of Contents

• Making a Voluntary Exit
• Option 1: Share Sale to Remaining Shareholders
• Option 2: Share Buy-Back by the Company
• Compulsory Exit Situations
• Restraint of Trade and Post-Exit Obligations
• Key Takeaways
• Frequently Asked Questions

As an exiting shareholder of a private company, you might encounter situations where personal or financial circumstances involve your departure from the company. When faced with such circumstances, you have the option to exit the company and sell your shares voluntarily. This article will guide you through the options you have as an exiting shareholder, such as selling your shares or buying them back.

Making a Voluntary Exit

Private companies do not have an easily accessible market to sell their shares, unlike public companies, which list and trade their shares openly. Private companies possess unlisted shares, making them more challenging to sell. Occasionally, the board of directors might reject a third party’s bid to purchase shares from an existing shareholder and join the company as a shareholder.

If there is no third-party purchaser available, you, as the exiting shareholder, have two voluntary exit methods:

1. you can sell your shares to one or more fellow shareholders; or
2. the company can conduct a selective share buy-back of your shares.

A combination of both may be possible.

Option 1: Share Sale to Remaining Shareholders

When you, as the exiting shareholder, sell your shares to other shareholders, you engage in a share sale transaction. It involves the transfer of shares from one shareholder to another for payment. This action increases the overall shareholding of the buying shareholder(s) according to the number of shares they acquire. Consequently, your number of shares decreases (in the case of a sell-down), or you cease to be a shareholder altogether (in the case of a total sell-off).

Price, Purchase and Market Value

Both the buyer and seller must agree on the purchase price. The sale should occur at a value at least equal to the total market value of the shares at the time of the sale.

Determining the value of a privately owned company may require assistance from the company accountant or a business valuer. If the sale price is lower than the market value, tax implications may arise for all parties involved in the sale, including other shareholders not part of the sale.

Additionally, performing a share transfer involves critical legal documents, such as:

1. resolutions from the company to approve the share sale, and note  that all requirements under the company’s constitution (if one exists) and shareholders’ agreement/deed (if one exists) have been complied with;
2. a share transfer form to legally transfer the shares; and
3. a share sale agreement, negotiated between the buyer and seller, which outlines aspects of the sale such as:

• the purchase price to be paid for the shares;
• when the purchase price will be paid (i.e. will it all be paid on completion of the share sale, will half be paid upfront and half in 6 months, etc.); and (amongst other aspects)
• warranties in relation to the shares, such as the seller warranting to the buyer that the shares are free of any registered security interests the seller may have granted to another party to secure a loan it took out. 

Key Documents

Additionally, performing a share transfer involves critical legal documents, such as:

1. resolutions from the company to approve the share sale, and note  that all requirements under the company’s constitution (if one exists) and shareholders’ agreement/deed (if one exists) have been complied with;
2. a share transfer form to legally transfer the shares; and
3. a share sale agreement, negotiated between the buyer and seller, which outlines aspects of the sale such as:

• the purchase price to be paid for the shares;
• when the purchase price will be paid (i.e. will it all be paid on completion of the share sale, will half be paid upfront and half in 6 months, etc.); and
• warranties in relation to the shares, such as the seller warranting to the buyer that the shares are free of any registered security interests the seller may have granted to another party to secure a loan it took out.

After a Sale

After completing any sale:

• the company will need to update the member’s register;
• the company must cancel the seller’s share certificate;
• you will need to issue new share certificate(s) to the purchaser(s); and
• the company must notify the Australian Securities and Investments Commission (ASIC) of the changes to the shareholdings.

Sometimes, the company must update the directors’ register and notify ASIC if a share transfer changes the directors.

Pre-emptive Rights

Under the Corporations Act, shareholders have pre-emptive rights. This means existing shareholders must be given the first opportunity to purchase shares before they are sold to third parties. These rights ensure that existing shareholders maintain their proportional ownership in the company and prevent unwanted parties from becoming shareholders.

However, pre-emptive rights are a replaceable rule under the Corporations Act. Companies can modify or exclude them through their constitution or shareholders’ agreement. Most private companies establish their own pre-emptive rights regime in governing documents. These often include more detailed procedures and timeframes than the statutory provisions. You must comply with the applicable pre-emptive rights regime, whether under the Corporations Act or your company’s documents. This applies unless you obtain shareholder waivers.

The Pre-emptive Rights Process

When pre-emptive rights apply, you must follow a specific procedure before selling to third parties. The process starts with serving a formal transfer notice on existing shareholders. This notice details the sale price, payment terms, and key conditions. Existing shareholders have a specified period, usually 30 to 60 days, to decide whether to purchase the shares. They typically purchase in proportion to their existing shareholdings.

If shareholders decline or fail to respond within the timeframe, you may sell to the third party on the specified terms. If the third party’s terms change, you must re-offer the shares to existing shareholders, who can match the revised terms.

Waivers

You must follow the procedures and rules in the company’s constitution and shareholders’ agreement or deed, if they exist. Before selling shares to another shareholder, ensure that you have permission to do so.

If you wish, you can deviate from the requirements of your company’s constitution, shareholders’ agreement or deed. In that case, you need a waiver from shareholders who are not a party to the share transfer (non-buying shareholders). Likewise, non-buying shareholders can confirm in writing that they are happy to deviate from specific requirements.

Option 2: Share Buy-Back by the Company

In this option, the company buys back your shares as an exiting shareholder. This type of share buy-back typically involves a selective purchase. The company is not offering to buy all shareholders’ shares. It is only repurchasing the ones you own.

Once the company completes the share buy-back process and cancels the shares, it nullifies any associated rights. This decreases the total number of company shares issued. Consequently, each shareholder’s ownership stake increases proportionally to their existing shareholding.

Before a selective share buy-back, the company must ensure it can pay the exiting shareholder without risking insolvency.

Notably, ASIC also imposes strict requirements for a company to carry out a share buy-back of a shareholder’s shares. The process involves:

• a board resolution, the explanatory memorandum to the shareholders (explaining the arrangement, reasons and key details of the share buy-back (such as the number of shares being bought-back, purchase price, etc.) and share buy-back agreement being prepared;
• the directors signing the board resolution and submitting the board resolution (along with the explanatory memorandum and share buy-back agreement) to ASIC (via mail), along with an ASIC Form 280;
• once ASIC receives the ASIC Form 280 and its attachments, the company and the selling shareholder must wait at least 14 days after lodgement of the ASIC Form 280 until the share buy-back agreements and members’ resolution (approving the share buy-back) can be signed; and
• the company must update ASIC and cancel the shares.

When the shares are cancelled and bought back, the company will then proceed to cancel the share certificates, update the members register, and pay the buy-back amount to the exiting shareholder. 

The above provides a general overview of the required process for a share buy-back. You need to carefully complete the required documents and make sure you follow the process correctly. Otherwise, you might consider the share buy-back invalid.

Guide to Share Sales

Want to sell your business? A share sale may be beneficial compared to an asset sale. Download our free Guide to Share Sales today.

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Compulsory Exit Situations

While this article focuses on voluntary exits, shareholders should be aware that certain circumstances may trigger compulsory share transfers. These typically include death or incapacity of a shareholder, termination of employment or directorship, insolvency or bankruptcy, or breach of the shareholders’ agreement. The company’s constitution and shareholders’ agreement will usually specify these trigger events and the process for compulsory transfers. Understanding these provisions is crucial as they may override your ability to choose your exit method.

Restraint of Trade and Post-Exit Obligations

Exiting shareholders, particularly those who are also employees or directors, may be subject to restraint-of-trade clauses that restrict their ability to compete with the company or to solicit customers and employees after exit. These restraints must be reasonable in scope, duration, and geographic area to be enforceable. The shareholders’ agreement may also impose ongoing confidentiality obligations regarding company information. Review these provisions carefully as they may affect your future business activities and should be considered when negotiating your exit terms.

Key Takeaways

Exiting shareholders who have chosen to leave the company voluntarily can either sell their shares to other shareholders or participate in a share buy-back if there is no third-party buyer available. You cannot force other shareholders to buy your shares, nor can the company or other shareholders compel you to sell unless specified in the company’s shareholders’ agreement.

Completing a share buy-back involves detailed requirements, which your company must strictly follow. Both you, as the exiting shareholder and the company should seek legal, tax, and financial advice before proceeding with the sale and purchase.

If you have any questions regarding the sale or buy-back of shares as an exiting shareholder, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions