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The exit of a director who is also a shareholder in a private company is often one of the most sensitive and complex corporate events a growing business can face. The treatment of their shares, options, and other entitlements depends heavily on the starting point; what the company’s articles of association, shareholders’ agreements, and the director’s service agreement contain, as well as the underlying reason for departure, whether that be resignation, removal, retirement, ill health, or misconduct.
We regularly advise both companies and individual directors on complex shareholder and corporate matters, including exits involving director-shareholders.
We advise both companies and departing director-shareholders on all aspects of exit planning, structuring, and negotiation:
For companies:
Reviewing articles and shareholders’ agreements to clarify obligations and protections
Advising on valuation, buybacks, and good/bad leaver provisions
Structuring and funding share purchases, including deferred or loan-backed arrangements
Negotiating comprehensive termination agreements covering indemnities, full and final settlements, non-competition, non-solicitation, and confidentiality
Managing exit negotiations to minimise disruption and reduce dispute risk
For departing directors:
Ensuring fair treatment under good/bad leaver clauses, buyback provisions, and option schemes
Protecting entitlements under service agreements and negotiating favourable termination agreements
Advising on indemnities, full and final settlement, and employment claims
Supporting negotiation to achieve a structured, enforceable exit
Our experience shows that prevention is better, and certainly less costly, than cure. Planning and preparing a comprehensive set of documents dealing with the implications of a director/shareholder exit prevents any uncertainty or disputes arising. We can prepare a suite of documents to provide certainty for all parties.
However if such documentation doesn’t exist we advise both companies and individual directors as to their rights and entitlements to achieve a negotiated exit if possible and avoid costly litigation.
Foundational documents set the framework.
Before any discussions about exit, it is critical to review the company’s articles, shareholders’ agreement, and director service agreement. These documents need to be considered together to establish the default rules for share transfers, buybacks, and termination entitlements:
Articles of association - standard provisions typically include pre-emption rights, board approval requirements for share transfers, and default buyback powers. While they provide a baseline, they rarely address good or bad leaver treatment in detail, meaning that without additional agreements, outcomes may be uncertain and litigation likely.
Shareholders’ agreements - these agreements usually govern negotiable aspects of the exit, including good/bad leaver classification, drag-along and tag-along share rights, and valuation methodologies. Where these provisions are absent or ambiguous, the treatment of shares and options can become highly contentious.
Director service agreements - employment contracts often contain notice periods, termination rights, and the treatment of options or incentive schemes. Gaps or ambiguities can create uncertainty over entitlements or give rise to disputes.
The underlying reason for leaving often determine the financial and legal consequences:
Resignation vs. removal - whether the director leaves voluntarily or is removed can influence whether they are treated as a good or bad leaver in accordance with the definitions within the articles or shareholders agreement, which in turn will impact any buyback obligations, discounts on shares, and option forfeiture.
Reason for departure - retirement, ill health, misconduct, or performance issues can all impact eligibility for benefits, discounts on repurchased shares, and treatment of options or other entitlements.
Even when foundational agreements exist, particularly if there is no clear guidance, a number of practical issues can arise:
Valuation of shares - without clear rules in articles or a shareholders’ agreement, the method and timing of share valuation is often a major source of dispute. Parties may disagree on whether net asset value, earnings multiples, or other valuation methodologies apply, and whether minority discounts or control premiums are appropriate. Disputes can be costly and time-consuming.
Funding the share purchase - the financial burden of buying out a departing shareholder can be significant. If the documents are silent on how purchases are funded, this can create uncertainty and delay. Solutions include using company reserves or cashflow, deferred or staged payments, bank or shareholder loans, or contingent consideration linked to company performance.
Options and incentive schemes - If agreements are unclear on the treatment of unvested or partially vested options, disputes can arise over vesting, exercise rights, or forfeiture. Co-ordinating option treatment with share repurchase arrangements is essential.
Termination agreements - comprehensive termination agreements are often negotiated alongside share exits. Key elements include full and final settlement of pay and bonuses, indemnities, non-competition and non-solicitation clauses, confidentiality obligations, and resolution of employment claims. Ambiguity in any of these areas can lead to contested claims and uncertainty.
Enforcement and dispute risks - where articles, shareholders’ agreements, or service agreements provide no specific rules on valuation, funding, or leaver classification, the risk of dispute is high. Poorly handled exits can damage relationships, disrupt business operations, and result in costly litigation or arbitration.
Tax considerations - share disposals, buybacks, and incentive scheme adjustments may trigger capital gains tax or other liabilities. Professional tax advice should always be obtained.
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