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Breaking up is hard to do. What to do when a shareholder leaves

Over a series of articles, Oliver King examines some of the traps and pitfalls of operating within a private limited company structure without the protection of either a shareholders’ agreement or bespoke articles of association. Poor preparation of a company’s constitutional documents can lead to disputes and ultimately the business failing.

Inevitably, the directors and shareholders of a company will be privy to a great deal of commercially sensitive information; customer lists, business opportunities, routes to market, pricing strategies, and there seems to be a general perception that this information is safe.

Well, yes and no.

As briefly touched upon in a previous article, the directors owe various duties to a company, but, barring a duty not to exploit property, information or opportunities of which they became aware whilst a director, these duties only really apply whilst that person continues to be a director. A shareholder owes no such duties to the company in which they hold shares; none at all.

There are laws pertaining to employees and confidential information, and certain information will be of a sufficiently high degree of confidentiality as to amount to a trade secret. If information is classified as a trade secret, then it will be protected both during, and following termination of, an individual’s employment, subject of cause to the cost of pursuing any breach.

However, the key word there is “employment”.

Directors are not necessarily employees of the company to which they are appointed, and further, the classification of information as a trade secret is a pretty high bar to vault.

Confidential information and trade secrets to one side, people deal with people they know, and there is nothing preventing an individual from selling his shares to his mate down the pub, resigning his directorship, and starting up a competing business two doors down from the first business.

Further, there is nothing to prevent this new business from employing employees of the former business, utilising the same suppliers and providing goods and services to the same customers – to the untrained eye of the customer, there may be little difference between the two.

A shareholders’ agreement can provide for restrictive covenants, and a clause dealing with confidential information, which will seek to prevent any person, whilst a shareholder, and for a given period following the disposal of their shares for any reason, from undertaking various actions which may harm the company.

These will usually include using any confidential information for any purpose not connected with the company, not forming, or being involved in any way, on their own or with any other person, with any business which may compete with the company and not soliciting or engaging staff of the first business.

When you consider what your business is worth to you, can you really take the risk that someone could sabotage your hard work when they leave?

Key contact

Oliver King

Solicitor

Call 01904 610886