Key Takeaways
- On its own, resigning as a director doesn’t affect any shares. Being a director and being a shareholder are separate roles.
- What happens to the shares depends on the company’s articles of association and any shareholders’ agreement, especially any leaver or compulsory transfer clauses.
- Without leaver provisions, a former director usually keeps their shares, votes and right to dividends, and can’t be forced to sell.
- Leaver clauses often set a different price depending on whether someone is a good leaver or a bad leaver, and disputes over those terms are common.
A co-founder has decided to step down. Maybe they’ve fallen out with the rest of the board or perhaps they want a new challenge. Either way, they still own a big chunk of the company.
If you’re one of the directors staying on, you might be worried about someone who no longer works in the business keeping a stake in everything you build from here. If you’re the one leaving, you might be worried about losing what you’ve spent years creating. Both worries are understandable, and the answer is often less obvious than people expect.
This guide explains what happens to a director’s shares when they resign, how leaver clauses work and what to do if an exit turns into a dispute. If you’re facing this now, Osbourne Pinner offers a free 30-minute consultation with our shareholder and director dispute solicitors.
Does resigning as a director affect your shares?
Not by itself. A director manages the company. A shareholder owns part of it. One person can do both, but the roles are legally separate, and giving up one doesn’t mean giving up the other.
When a director resigns, their appointment ends in line with the company’s articles, and the company must notify Companies House within 14 days under section 167 of the Companies Act 2006. Nothing in that process transfers or cancels their shares. They stay on the register of members exactly as before.
What rights does a former director keep as a shareholder?
Unless the company’s documents say otherwise, a former director who keeps their shares keeps the rights that come with them. That typically includes voting at general meetings, receiving any dividends declared on their shares and receiving copies of the company’s accounts.
The size of the stake matters. A shareholder with more than 25% can block special resolutions, such as changes to the articles. What they lose is their seat at the board table. So, access to board meetings, day-to-day management information and a say in operational decisions.
What do the articles and shareholders’ agreement say?
This is always the first question. The company’s articles of association and any shareholders’ agreement decide whether a departing director has to sell, to whom and at what price.
Many small companies still use the standard Model Articles for private companies, which contain no leaver provisions at all. Bespoke articles and shareholders’ agreements often include:
- Compulsory transfer clauses, requiring a director or employee who leaves to offer their shares for sale.
- Good leaver and bad leaver definitions, which decide the price they receive.
- Pre-emption rights, giving existing shareholders first refusal on any shares being sold.
- Valuation rules, such as appointing an independent valuer if the parties can’t agree a price.
Read both documents together. Where they conflict, the shareholders’ agreement will often say which one prevails.
Good leaver or bad leaver?
Leaver clauses usually sort departing shareholders into two groups:
- Good leavers typically include people who leave because of ill health, death, redundancy or retirement.
- Bad leavers typically include people dismissed for gross misconduct or who breach restrictive covenants.
Where resignation falls depends entirely on the drafting. Some agreements treat resignation within a set period as a bad leaver event, while others treat it as good leaving.
The label matters because it usually decides the price. A good leaver might receive market value for their shares, while a bad leaver may receive much less, sometimes only the nominal value or what they originally paid. The courts have generally been prepared to enforce clearly drafted leaver provisions, even where they produce a harsh result, so the wording needs close attention before anyone resigns.
Disputes often turn on how the departure is classified, or on valuation, such as whether a minority stake should be discounted because it doesn’t carry control.
What if there are no leaver provisions?
Then the former director generally keeps their shares and can’t be forced to sell them. The remaining shareholders have a few options:
- Negotiate a buyout, agreeing a price for the other shareholders to buy the shares.
- Arrange for the company to buy back the shares, which is possible but must follow strict rules in the Companies Act 2006, including on how it’s funded.
- Accept the former director as a passive shareholder, with clear expectations about information and dividends.
Trying to change the articles after the event to force a sale is legally difficult and open to challenge. It’s far better to put leaver provisions in place while everyone still gets on.
What about share options?
Share options work differently from shares already owned. Many option schemes, including EMI schemes, say that unvested options lapse when someone leaves, and some give only a short window to exercise vested options. Check the scheme rules and the individual option agreement, as these decide what happens.
When does a director’s exit become a dispute?
Problems often arise when a resignation isn’t really voluntary. A director who feels they were pushed out, excluded from management or denied information may argue that the company is being run in a way that unfairly prejudices their interests as a shareholder.
Under section 994 of the Companies Act 2006, a shareholder can petition the court for relief from unfairly prejudicial conduct. The most common remedy is an order for the other shareholders to buy their shares at a fair value. These claims are especially common in smaller companies run as quasi-partnerships, where the founders expected to be involved in managing the business together.
A director who resigned entirely of their own accord will usually find it harder to argue they were excluded. That’s one reason the circumstances of an exit, and how it’s documented, matter so much.
What should you do before a director leaves?
Whether you’re leaving or staying, a few steps help avoid a dispute later:
- Read the articles, shareholders’ agreement and any service contract before anyone resigns.
- Record the resignation formally, and make sure Companies House and the register of people with significant control are updated.
- Settle any director’s loan account and agree how confidential information will be handled.
- Check any restrictive covenants in the director’s employment or service contract.
- Get an independent view of the shares’ value before negotiating a price.
If relations have already broken down, get advice early. Our dispute resolution solicitors can help negotiate an exit before it reaches court.
Get advice on a director’s exit
A director’s departure can leave a company with an inactive shareholder holding a significant stake, or leave the departing director at risk of losing value they’ve spent years building. How the exit is handled often decides whether it ends in agreement or in court.
At Osbourne Pinner, our shareholder and director dispute solicitors advise both companies and departing directors on leaver provisions, share valuations, buyouts and unfair prejudice claims. We’ll explain where you stand in plain English and give you a clear view of costs before you commit to anything.
Please note that this article is for informational purposes only and does not constitute legal advice. We always recommend speaking to a qualified solicitor for advice tailored to your specific circumstances.
We offer a free 30-minute consultation to discuss your situation, Monday to Friday. You can speak with us via video call or visit our offices in Piccadilly Circus, Canary Wharf, Wimbledon, Harrow or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below. We do not offer Legal Aid.
