You may find yourself at a point where you no longer want to continue with your business. Maybe you and your founder no longer share the same long term view for the business. Or, perhaps you have another business idea that you want to pursue. If this is the case, how do you get out of the business? This article will explain how to leave your business if you are a director or shareholder in your company.

How Are You Connected With the Company?

Your connection to the company may be that you are a:

  • director;
  • shareholder;
  • unitholder; or
  • all of the above.

How you can exit your business will depend on the ways you are involved in the business. The first step is to identify all the different roles you hold within the company. Then, you need to break down how to extricate yourself from each role.

Leaving Your Business as a Director

If you want to leave as a director, you need to resign. It is the same process like any other job. You need to send a signed and dated letter stating the date on which you want to resign to your company’s registered address. The company will need to update ASIC within 28 days of your resignation.

If you are the sole director, you cannot resign. Another director must be appointed before you can resign.

If you are also a shareholder, it is a good idea to time your resignation with the sale of your shares. That way you still retain control over the business, until you can exit both roles at once.  

Leaving Your Business as a Shareholder

If you hold shares in the company, you might want to sell them as part of your exit. 

You should first look at your shareholders agreement. This will tell you if there are any restrictions on selling your shares. If you do not have a shareholders agreement, your company constitution is the best starting point for confirming the sale process. Usually, you need to offer your shares to all shareholders, before you can sell them to any third party. 

If your business is not going well, you might struggle to find a third party who wants to buy your shares. The only potential buyers might be your existing shareholders. You will have to negotiate with the other shareholders until you can agree on a sale price. Unfortunately, the other shareholders may have the upper hand here. It may be worthwhile obtaining an independent valuation of the company to justify the price you are asking for. 

Once you have decided on a price, you need to execute the share sale documents. It may not be necessary to have a formal share sale agreement in place. You will need to:

  • sign a share transfer form; and 
  • notify ASIC of the transfer.

What if We Cannot Agree on a Price?

If you cannot agree on a price, you cannot force the other shareholders to buy your shares. Therefore, you have to continue to negotiate or find a third party to purchase your shares. 

What if I Want to Keep My Shares?

You might be able to keep your shares, even if you resign as director. It will depend on:

If you have unvested shares, you will likely have to sell them to the other shareholders when you resign. Sometimes, this will be for a pre-agreed price. Worst case scenario, you might have to surrender them for no value. If you have vested shares you might be able to keep them. Read your shareholders agreement and your vesting agreement (if you have one).

Leaving Your Business as a Unitholder

Some businesses are run through a trust or through companies stapled with a unit trust. If this is your structure, you will own both shares and units. Importantly, this is distinct from owning the shares in your company through a discretionary trust (which is a common way people hold shares).

If your business is run through a trust or stapled structure, you will need to review your trust deed to confirm the process for selling your units. Hopefully, you have a shareholder and unitholders deed so the entire sale process is documented in one place. If this is the case, the sale process is likely to mirror the process for the sale of your shares.

Are You Leaving Because of Cash Flow Problems?

If you are seeking to exit your business because of cash flow issues, you should get legal and accounting advice as soon as possible. If you are a director, you will be in breach of your directors’ duties if you let your company continue to trade while insolvent. 

You should consider getting a registered liquidator to review your business and provide you with some options.

If your company is already in liquidation and you want to leave, you should be aware that you will still be required to assist the liquidator. You will also be part of any investigation into the company’s solvency, including whether any breach of director duties took place. 

What Happens After I Leave?

After you leave, you should be careful about starting up any new businesses. Often, shareholders agreements have restraints on shareholders starting competing businesses. Read your shareholders agreement carefully.

If you are leaving an insolvent company to start another company which is essentially the same business, this is illegal. You will face serious penalties for this kind of activity, including:

  • large fines; and
  • imprisonment.

Key Takeaways

If you want to leave your business, you need to get across all your different roles in the business. The way you can exit will be different for each of them. You may need to resign as director. You may need to sell back any shares you have in the business (unless you want to keep them). Be careful about leaving if you know your company is experiencing cash flow issues. If you need legal advice about leaving your business, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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