What happens if a shareholder decides to leave the corporation?

It is not uncommon in a small corporation for one of the shareholders (who is often also an officer and director) to leave the business. This could happen due to disagreements on running the business, health reasons, family issues, relocation, or one of many other reasons. If that happens, what do you do with the corporation?

Separation in a small corporation is somewhat analogous to a divorce. You have to decide what the business is worth and what each shareholder wants out of it. Often, the remaining shareholders want to keep the business operating so the question really becomes one of valuing the interest of the shareholder leaving. It is wise business planning for shareholders to have already discussed this possibility and prepared for it by entering into some form of Buy-Sell or Shareholder Agreement.

A Buy-Sell Agreement sets out the procedure for the purchase of shares by the corporation or remaining shareholders and the method to value the shares. Buy-Sell Agreements are sometimes prepared up front as part of the initial incorporation process and sometimes later on.

If the shareholders have made no plans and have no agreement, then they will have to negotiate a separation and decide on how to value the stock of the shareholder leaving. This is much harder to do if left to the time when a shareholder is leaving than it is early on in the corporation’s existence.

If shareholders simply cannot agree and become deadlocked and unable to make a decision, one of them may have to file a petition with the court to dissolve the corporation and distribute the assets. This, of course, is usually a last resort due to the time and costs involved.