Suppose you own a business with other shareholders involving multiple parties. In that case, it is best to prepare for a situation where one or more shareholders want to leave the business. This article will highlight some important considerations you should keep in mind when discussing and negotiating the exit of a shareholder. These important considerations relate to protecting your business, including protecting confidential information, intellectual property and imposing a non-compete clause. This article explores what you need to consider when a shareholder leaves the business.
Why is this Important?
If you are buying shares, you are making a significant investment in a business. Confidential information and intellectual property are important business assets. Potential shareholders will expect the business to protect these things if they consider investing. Thus, if a shareholder leaves the business, you must protect these assets. Let us explore some potential aspects you should consider.
Protecting Confidential Information
Shareholders have access to a range of confidential information during their involvement in the business. Confidential information includes annual financial information, business plans, commercial arrangements, business dealings, and trade secrets.
The share sale agreement needs to include a strong confidential information clause to adequately protect this information when a shareholder exits the business. The clause should define confidential information broadly and prohibit the seller from using it for any purpose. There are standard exceptions for disclosing confidential information that is required by law. You must include these in the clause.
Continue reading this article below the formProtecting Intellectual Property
A shareholder may be involved in creating intellectual property. Additionally, a shareholder who also worked in the business may have considerable involvement in creating intellectual property.
The seller must be confident that the intellectual property stays with the company. It should be listed and assigned to the company, along with supporting clauses about the seller signing other documents as required to support this assignment. The agreement should expressly waive moral rights to intellectual property in the agreement. If an exiting shareholder has developed considerable intellectual property assets, you may want to consider drafting a separate intellectual property assignment agreement for them to sign.
Suppose the seller refuses to assign the intellectual property. In that case, the buyer of the shares may consider accepting a license. However, this would be unusual and may not be the best-case scenario as there is often consideration value in intellectual property for a company.
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Shareholder Non-Compete Clause
A non-compete clause is an important clause in a share sale agreement to protect the business’s commercial interests. It sets out the seller’s prohibitions on competing with the business. These prohibitions protect the buyer’s investment, so the seller does not sell their shares and then set up or join a competing company.
Whether the courts will uphold a non-compete clause and how strict it can be, depends on the circumstances of each matter. However, you should consider a few things when drafting a non-compete clause.
A well-drafted non-compete clause will include cascading areas and time-frames for the non-compete clause. For example, this may include regions such as Australia, New South Wales and Sydney, as alternative options, in case the courts find that Australia or New South Wales is too broad. It will also have time options such as 3 years, 2 years and 1 year if the courts find the longer periods unreasonable.
Key Takeaways
It is important to have an experienced lawyer create your restraint of trade clause so that they can help draft a strong clause that is more likely to be upheld. A good non-compete clause will also cover not poaching clients, staff or suppliers.
If you need assistance with a shareholder leaving your business, our experienced business 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
A shareholder is a person, company or other entity that owns at least one share of a public or private company’s stock. Shareholders in private companies are usually directors, employees and investors.
Intellectual property refers to something an individual creates, invents, designs or writes. The owner can sell, transfer or lease it.
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