In the United States, the deed of termination of a shareholders’ agreement is used when the parties to a shareholders’ agreement want to terminate their arrangement. There are a variety of reasons for which the parties may want to end their shareholders’ agreement but most often the parties will terminate it when a new investment is made in the company and it is therefore necessary to create a new shareholders’ agreement.
In other words, when a new entity or individual becomes a shareholder by purchasing shares in the company, the existing shareholders may terminate the shareholders’ agreement by consent and replace it with a new one. Before the new shareholders’ agreement comes into effect, the shareholders terminate the existing shareholders’ agreement by deed of termination. The deed of termination of shareholders’ agreement terminates the contract by consent of the parties.
The deed of termination of shareholders’ agreement is a rather simple contract
It requires that all the parties to the shareholders’ agreement being terminated are parties to the deed of termination. Simply put, the same parties who sign the shareholders’ agreement must sign the deed of termination. However, perhaps most importantly, the deed should provide a waiver and release clause. The clause should state that the shareholders waive and release all past, present and future liabilities and claims against each other.
The effect of the deed is to terminate the shareholders’ duties and responsibilities under the original shareholder’s agreement. However, if the shareholders want to preserve certain provisions from the original shareholders’ agreement going forward then a clause must be included in the deed to that effect. Shareholders should decide which provisions they want to maintain but generally it is recommended the deed includes a confidentiality clause. A simple deed of termination of shareholders’ agreement may include the following clauses:
- waiver and release
- further action
- effect of termination
- counterparts and governing law and jurisdiction.
In addition, a restraint clause can be included in a deed of termination of a shareholders’ agreement in order to protect the goodwill of the company and prevent a shareholder who leaves the company from competing with the business, taking clients and benefiting from the company’s knowledge and experience. Typically, a restraint clause in a deed of termination of shareholders’ agreement prevents a shareholder during the term of the agreement and for a specified period after termination from:
- Competition. The restraint clause in the deed of termination should prevent the departing shareholder from competing with the company by setting up a new and similar company
- Poaching. The restraint provision can prevent the departing shareholder from taking any of the company’s employees or clients.
- Interference. The clause can stop the departing shareholder from interfering with important contractual relations such as the contract with the suppliers, service providers, etc.
- Assistance. The restraint provision in the deed of termination can stop the departing shareholder from assisting any individual or entity with any of the activities above.
Your knowledge and client relations are valuable to the company and should be well protected. Contact us or schedule a consultation with your business attorney in Miami, Florida USA to help you plan and execute a deed of termination of shareholders’ agreement.