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What should the partnership or shareholders agreement say about someone leaving the business?

A partnership or shareholders agreement should anticipate the eventual departure of a partner or shareholder. Sooner or later, an individual may want to retire or to realise part or all of their investment in the business. An exit may be the best way to resolve a difference of opinion on how to take the business forward. Or an individual might die or become incapacitated.

Without an agreement, these sorts of situation tend to lead to disputes and undesirable outcomes. A good agreement can protect the interests both of the individual who is leaving and the remaining partners or shareholders.

Key issues to consider include:

  • How any shares or interest in the partnership will be valued.
  • Who shares can be sold to, and whether the existing shareholders will have the right of first refusal.
  • Where the remaining shareholders or partners are buying out an individual, how they will be able to finance this.
  • How the interests of various shareholders can be balanced — for example, if a majority shareholder wishes to sell.
  • What will happen to an individual’s shares (or partnership interest) if they become insolvent, get divorced or die.
  • What will happen if an individual is no longer able to carry out their role.
  • What will happen if the owner-managers or business partners no longer wish to work together — for example, whether an individual can be forced out.
  • What notice is required if an individual wishes to leave the business or sell their shares.
  • Any restrictions that will apply after someone has resigned — for example, stopping them working for a competing business.

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