Partners enter a joint venture with enthusiasm, then their views or circumstances diverge and one wishes to leave. They then discover that exiting a company is not like selling a car. They may need their partners' consent, the partners may hold pre-emption rights, and they may disagree fundamentally over the value of the interest. The result is that many partners remain locked into companies they no longer want for years. Companies Law No. 1 of 2016 regulates these matters, but the most important element remains the constitutive contract and the shareholders' agreement. This article explains the routes to exit and their procedures.
Routes to Exit
- Selling the interest: the most common route, to another partner, to the company itself within the limits the law permits, or to an outside party.
- Gratuitous transfer: such as a gift to a relative, subject to the same restrictions as a sale.
- Withdrawal: the constitutive contract may permit it on conditions, requiring repayment of the partner's interest under an agreed mechanism.
- Capital reduction: by cancelling the partner's interest and repaying its value, requiring a general assembly resolution and protection for creditors.
- Dissolution: the last resort where the partnership cannot continue, requiring grounds provided by law or the contract.
- Death: the interest passes to the heirs, and the contract may contain particular provisions on this deserving attention.
Consent and Pre-Emption
- Personal character: a limited liability company rests on personal considerations, so the admission of a new partner is restricted.
- Partners' consent: the constitutive contract ordinarily requires the consent of the partners or a majority to a sale to an outsider.
- Pre-emption: the contract usually gives partners a right to purchase the offered interest on the same terms before it is sold to a third party.
- The practical procedure: the selling partner notifies the others in writing of a defined offer stating the price, terms, and the identity of the buyer, and they are given a period to exercise their right.
- Silence: where the period expires without response, the sale to a third party may proceed on the same terms offered rather than better ones.
- Sale in breach: selling without observing this procedure is ineffective against the company and the partners and may be challenged.
- Sale between partners: usually free of restriction, as it admits no new partner.
Valuing the Interest
The real focus of dispute in most cases:
- Nominal value: what is recorded in the constitutive contract, usually not reflecting real value after years of trading.
- Book value: the interest's share of net equity per the financial statements, more accurate than nominal value but ignoring intangible value.
- Market value: what a genuine buyer would actually pay, reflecting reputation, customers, existing contracts, and the company's earning capacity.
- An agreed mechanism: by far the best solution is for the shareholders' agreement to fix a clear valuation mechanism in advance, such as an earnings multiple or an independent valuer whose determination is binding.
- Judicial expertise: absent agreement and where disagreement hardens, an accounting expert is appointed to value the interest, a lengthy and costly route.
- Deducting liabilities: the valuation takes account of the company's debts and contingent liabilities such as pending claims.
Where Partners Obstruct
- The problem: partners may refuse to buy while simultaneously refusing consent to a sale to a third party, leaving the partner locked in.
- Abuse of right: a double refusal without objective justification may be characterised as abuse and may be put before the court.
- Withholding profits: where obstruction is coupled with withholding profits, the grounds of claim multiply and the partner's position strengthens.
- Dissolution claim: in extreme cases where the company cannot continue because a fundamental disagreement paralyses its activity, judicial dissolution may be sought.
- Mediation: a settlement through neutral mediation is usually faster and cheaper than proceedings lasting years and harming the company itself.
- Legitimate pressure: exercising rights of inspection, accountability, and requisitioning a general assembly creates a balance driving towards settlement.
Completing the Sale
- Form: a sale agreement is executed, notarised, and registered in the commercial register to be effective against third parties.
- Amending the constitutive contract: the sale requires amendment and publication under the prescribed procedures.
- Pre-sale liabilities: who bears obligations arising before the sale must be regulated and stated expressly in the agreement.
- Warranties: a buyer should require representations and warranties from the seller as to the company's legal and financial position and the absence of undisclosed liabilities.
- Retention of part of the price: a practical arrangement protecting the buyer against surprises emerging after purchase.
- Release: the seller should obtain a release from the company's subsequent obligations and have their personal guarantees to banks cancelled. Most sellers overlook this and remain guarantors of a company in which they no longer hold an interest.
Practical Guidance
- Put a shareholders' agreement in place from formation regulating exit and the valuation mechanism. It is the most valuable document in a dispute.
- Fix a defined period for exercising pre-emption so that a sale is not blocked indefinitely.
- Agree in advance on an independent valuer whose determination is binding, saving years of judicial expertise.
- Do not sign a sale agreement before your personal guarantees to banks and other bodies are released.
- Record every offer and response in writing, as correspondence is your evidence of obstruction if it occurs.
- Buyers should conduct legal and financial due diligence before purchase, as an interest carries its share of the problems.
Exiting a company is a decision planned at entry rather than at the point of disagreement, and a well-drafted shareholders' agreement is what makes it possible without dispute. Yamnak Law Firm drafts shareholders' agreements and share sale agreements and handles amendment procedures, and represents partners in exit and valuation disputes before the courts.
