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Shareholders Who Quit As Employees Might Not Have to Sell Their Shares if They Don’t Want To

I have written on this blog several times that termination of employment potentially constitutes shareholder oppression.  As written previously, if a court finds that the termination frustrates a shareholder’s reasonably held expectations, then the termination may be deemed oppression, and the oppressed minority shareholder may be afforded the remedy of a buyout.  However, what about the flipside of that scenario?  It is also often the case that an employee will quit, and the majority owners will assume that they can then buy out the shareholder, even if the shareholders’ agreement does not specifically provide for this situation.  Are they right?

Fortunately for minority shareholders, majority owners who hold this view are usually not correct.  If there is no provision in a shareholders’ agreement (or operating agreement) mandating that a shareholder who quits as an employee must sell, then there may be no basis to compel a sale.

What about the many clients who insist upon the existence of an “implied term” contained in a shareholders agreement (or operating agreement) that “everyone knew about”?  In the case of an employee who leaves, majority owners often contend that there was an implied agreement that if an employee leaves, he is required to sell.  While the totality of the circumstances will have to be analyzed to determine whether such an argument could prevail, the enforceability of such a provision may be extremely difficult to prove.

A properly drafted shareholders’ agreement may require such a sale, but it doesn’t have to. And more often than not, unfortunately, a shareholders’ agreement is, simply put, not “properly drafted.”  Several cases I have handled over the years would have been infinitely simpler, and hundreds of thousands of dollars cheaper, if the drafters of the agreement had simply required someone whose employment terminated – for whatever reason – to sell.

So, if you are a minority shareholder who has quit your job and the majority wants to you accept a buyout but you have no interest in selling, then, quite simply, don’t sell.  Don’t get caught up in the argument that, since you don’t work here anymore, you must sell.  More often than not, a terminated employee probably cannot be forced to sell.