Being a shareholder in a company, the very fact is often filled with a certain degree of mysticism. Shareholders are often uncertain as to how to exit companies or how to manage their shareholding effectively during the tenure.

 

Perhaps it is because shares are intangible? The fact remains, there is no magic in shares, they are assets like fixed properties and should be treated in exactly the same manner.

 

Shares are a representation of the underlying value of the company and a shareholder owns this in the proportion to their shareholding. The underlying value of the company can be determined in a number of ways, the most notable being the net asset value calculation and market value.

 

The net asset value, or fair value, uses a metric whereby a current snapshot of the company’s financial position is taken. Basically, assets minus liabilities fairly valued.

 

The market valuation, in contrast, is a forward-thinking exercise and considers goodwill as well as future potential performance.

 

Regardless of the method used, the shares represent this monetary value.

 

Like other forms of co-ownership, such as jointly owning a fixed property or house, the ownership is in the asset in undivided shares. Therefore, exiting from such a structure follows that the other owners should enjoy a preference to buy. Only once this has been exhausted, can the shareholding be sold to a third party.

 

The other side of this, are situations where the exit is not voluntary but perhaps rather due to illness or death or similar unforeseen circumstances. Be that as it may – whether voluntary or not, the consequences remain the same.

 

A problem arises when there is no Shareholders Agreement. Shareholders agreements detail the process which shareholders need to follow to exit the company. In some instances, the Memorandum of Incorporation (“MOI”) of the company may also detail these provisions, but generally these are found in the Shareholders Agreement, simply because this is the document appropriate to direct these confidential arrangements.  In the absence of either, the shareholder is left with only one remedy –approaching court to detail how exit should occur.

 

It is therefore crucial, if you are not the only shareholder in a company, to ensure you have a custom-made MOI and Shareholders Agreement in place. It creates certainty for both voluntary and forced exists, as well as agrees on a valuation mechanism.

 

It is crucial to obtain professional advice about this before contemplating exit.