QLD Commercial Law - Where Do Shareholders Stand?

[danielle-marie]

We're looking to get some help on the following scenario please:

• A private company has 4 shareholders: Shareholder A, Shareholder B, Shareholder C, and Shareholder D.
  
• The company is limited by shares.
• The shareholders are not currently employees in the company, however, they do work in the company with a specified roles and responsibilities as a shareholder.
• Shareholder A and B have 35% shares each.
• Shareholder C and D have 15% shares each.
• Shareholder A is the Director.
• A Shareholders Agreement, Buy Sell Agreement, Share Sale Agreement, and Certificate of Shares are in place.
• The company is a fairly new startup and the shareholders are not currently drawing a wage, nor have they received dividends.

Shareholders C and D recently sent their resignation letters and stated in the letter that their resignation is effective immediately. They also stated in the letter that they wish to discuss retaining stock options in the company. The option for a resigning shareholder to retain stock options is not mentioned in any signed agreements.

Shareholders C and D have expressed to the other shareholders that their reasons for resigning from the company are due to them believing the company is failing.

The Buy Sell Agreement states the following in relation to this scenario:

• Call Trigger
  
  Each Shareholder grants to each other Shareholders an option to buy all of the selling Shareholder’s Shares after the occurrence of a Trigger Event in respect of the selling Shareholder, except that the call option shall relate only to the proportion of the selling Shareholder’s Shares that the buying Shareholder’s Shares bears to all the Shares held by the buying Shareholders together. Refer to clause 7.
  
  
• 7) Occurrence of Trigger Event
  
  7.1) Occurrence of Trigger Event where the Shareholder Exits the Company
  
  On the occurrence of a Trigger Event whereby a Shareholder exits the Company either voluntarily or due to retirement or bankruptcy, and wishes to sell their Shares, the following steps will take effect. A time frame of 6 months will be provided to complete these steps, during which time the Shareholder must maintain their role within the Company:
  
  i The Company will be offered the first opportunity to purchase that Shareholder’s Shares.
  
  ii If the Company does not wish to purchase that Shareholder’s Shares, the Director(s) of the Company will be offered the second opportunity to purchase that Shareholder’s Shares.
  
  iii If the Director(s) do not wish to purchase that Shareholder’s Shares, the remaining Shareholders will be offered the opportunity to purchase that Shareholder’s Shares collectively with the Shares distributed evenly between all or some of the Shareholders. In the event that a Shareholder does not wish to purchase and distribute that Shareholder’s Shares evenly between all or some of the Shareholders, but instead wishes to purchases that Shareholder’s Shares outright, this will trigger a tender with a third party present and the highest bidder will be able to purchase the Shares of that Shareholder, with the reserve being the value of the Shares at the time of offer.
  
  iii If the Shareholders do not wish to purchase that Shareholder’s Shares, all Shareholders will source a replacement Shareholder to purchase that Shareholder’s Shares and takeover that Shareholder’s position within the Company. A suitable replacement Shareholder will be one that can takeover that Shareholder’s role and responsibilities and will be agreed upon by all existing Shareholders
  
  iv If the Shareholders are unsuccessful in sourcing a replacement, the selling Shareholder can sell their shares to another individual who wishes to purchase those shares and is willing and able to take over that Shareholder’s position within the Company.

Shareholder C has expressed that they will no longer maintain their role in any operational capacity, even though the Buy Sell Agreement states that the resigning Shareholder must allow 6 months for the transition of a replacement shareholder, during which time they must maintain their role.

Where do Shareholders C and D stand in this scenario under Commercial Law? Would the correct course of action be to hold a shareholders meeting and put the retaining of stock options to a vote? The Shareholders Agreement states that the Director has the final say in the event of a hung vote.

 

[Victoria S]

Given the importance of this issue to you, you need to get it right and get legal advice from a commercial lawyer: Get Connected with the Right Lawyer for You

Did the other shareholders end up being given the option to buy the shares, and did the Director exercise their casting vote?

 

[Tim W]

First things first - they can't resign if they are not employees.