This article was last updated 0 months ago and may not represent current law.
It is becoming more common for employees to be given shares in the company they work for. Sometimes this happens through a formal scheme like EMI options, other times it is a simple issue of shares to key staff. The idea is to make employees feel invested in the company’s success and to reward them if the company grows.
That works well while relationships remain positive, but difficulties can arise when an employee-shareholder leaves the business or when there is a wider shareholder dispute, and at that point everyone wants to know what those shares are really worth.
When you are both an employee and a shareholder, the answer is rarely straightforward. In this article, I look at what happens when a company wants to part ways with an employee shareholder.
Incidentally, I recommend you do not give shares to employees without reading this article first.
Two roles, two sets of rights
An employee-shareholder is in a dual position. As an employee, they have rights under their employment contract and employment law, such as notice pay, benefits during the notice period, and possibly redundancy or unfair dismissal compensation. As a shareholder, they have rights under the Companies Act 2006 and the company’s constitutional documents, such as the articles of association and any shareholders’ agreement.
For companies, this means that the departure of an employee-shareholder cannot usually be resolved simply by ending the employment, because the person you have dismissed still owns their shares the next morning, and can still vote them and receive dividends on them. For individuals, it means that losing the job does not automatically take the shareholding away.
Employment entitlements
When employment ends, certain payments are usually due. The employee is entitled to their notice, either worked or paid in lieu, and to the benefits they would have had during the notice period, such as pension contributions or healthcare. There may also be compensation on top, which could be a redundancy payment, or a basic award and damages for unfair dismissal if the termination is challenged.
On unfair dismissal, an employee currently needs two years’ service to bring a claim, but for dismissals which take effect on or after 1 January 2027 that drops to six months and the cap on the compensation a tribunal can award is removed. A company planning to part with a senior employee who also holds shares should have that in mind when it works out what the employment side of a deal is worth.
These rights are separate from the value of the shares and need to be dealt with in parallel.
Leaver provisions and shareholder documents
Most businesses anticipate that employee-shareholders will eventually leave, and so the company’s articles of association or shareholders’ agreement often include leaver provisions. These say that someone who stops being an employee has to offer their shares for sale, and they set the price.
They usually distinguish between good leavers and bad leavers. Good leavers are typically those leaving through retirement, ill health, or after a defined period of service, and they may be entitled to sell their shares at fair market value. Bad leavers are typically those dismissed for misconduct or who resign to join a competitor, and they may only receive nominal value or the original subscription price for their shares.
This distinction can make a dramatic difference to outcomes. Employers rely on it to protect the business from disruptive exits, while employees are often surprised at how little their shares can be worth in certain circumstances.
But if you don't have these in place because you just issued shares to an employee, then you cannot rely upon them - there are no real rules. The company may have no way of making the departing employee sell, and the employee may not want to sell at the price offered, which often leads to stalemate.
That leaves one of three things. An agreement is reached to buy the shares and terminate the employment, or a dispute arises as to value, or a court claim is required.
How valuations are carried out
Where shares are to be valued, several approaches are commonly used. Fair market value is the price a willing buyer would pay a willing seller, both acting reasonably. Net asset value is the value of the assets minus the liabilities, which suits asset-heavy companies. An earnings multiple is often based on EBITDA, applying a multiple which is standard for the industry. Discounted cash flow projects future profits and discounts them back to today’s value, and is less common in small private companies.
A further consideration is whether a minority discount applies. A 10% stake is rarely worth 10% of the company’s overall value, because a small holding does not come with control or much influence, and a buyer would pay less for it.
All of these have such wide variables that I would always recommend independent valuation advice to be obtained - although there's a cost to this, if the parties can agree jointly to instruct someone and then stick to their valuation, it would make life a lot easier!
Litigation as a last resort
If negotiation fails, disputes sometimes reach court. The most common route is an unfair prejudice petition under section 994 of the Companies Act 2006, where a shareholder claims that the company’s affairs are being conducted in a way that unfairly prejudices their interests.
Courts can order a share buyout at “fair value”. Whether a minority discount applies depends on the circumstances. For example, if the business operated like a quasi-partnership, courts may refuse to apply a discount.
However, litigation is expensive, lengthy and uncertain. Expert valuations are often contested, legal fees escalate, and the business itself can suffer from the distraction. For both companies and individuals, court is generally the worst option and should be treated as a last resort.
Settlement is usually the best option
The far better route is usually negotiation, and a settlement of this kind has two halves which need to be agreed together.
The first is the employment. Compensation for the termination is usually documented in a settlement agreement, under which the employee waives their employment law claims. Up to £30,000 can be paid tax free under a settlement agreement, provided it is genuine compensation and not a diverting of price away from the shares.
The second is the shares. The price is either agreed directly or determined by an independent accountant, and the sale is documented in a share purchase agreement, which records the price, the number of shares and any warranties about ownership. There will also be a stock transfer form, which is the legal document transferring ownership of the shares and which must be lodged with the company and reflected in the company’s next confirmation statement at Companies House, and board or shareholder resolutions to formally approve the transfer.
This package allows for a clean break. Employment rights are addressed, the shares are transferred, and the parties move forward without lingering disputes.
Mediation and negotiation
Mediation is often highly effective in shareholder disputes. Because valuation is rarely an exact science, there is usually scope for compromise, and an independent mediator can help both sides explore settlement options that balance the employment compensation against the share value. I should say that although I trained as a mediator, I don’t offer mediation as a service, so this would be somebody the two sides appoint between them.
Businesses benefit by protecting their reputation and continuity. Individuals benefit by avoiding the time and stress of litigation.
Tax treatment
The structure of a settlement also affects tax, and I should say that I don’t give tax advice, so both sides should speak to their accountants before the figures are agreed.
Broadly, employment payments are subject to PAYE and National Insurance, though the first £30,000 of a genuine termination payment may be tax free. The proceeds of selling the shares are generally subject to capital gains tax, for which the main rates are 18% and 24%.
When I first wrote this article I said that Business Asset Disposal Relief may reduce the rate to 10%. That rate ended on 5 April 2025, and the relief is now charged at 18% for disposals from 6 April 2026 (it was 14% in the 2025 to 2026 tax year), on up to £1 million of gains over a lifetime, so it only saves tax for someone who would otherwise be paying 24%. Many employee-shareholders won’t qualify for it in any case, as outside an EMI scheme the conditions include holding at least 5% of the shares and the votes for two years.
Both sides need to factor tax into negotiations.
Practical points for both sides
For companies, check the shareholders’ agreement and the articles when issuing shares to employees, as clear leaver provisions can prevent later disputes (there is more on my shareholders’ agreements page). If a dispute does arise, consider early negotiation rather than risking court.
For employees, understand the small print before accepting shares, and do not assume they will always be worth market value on exit. If you are leaving, calculate both your employment entitlements and the potential share value before entering negotiations.
For both, take early advice, consider mediation, and treat court as a last resort.
I've helped many companies and individuals involved in shareholder disputes and the sale of shares following a dispute, and the exiting of employees by settlement agreement. I can give initial advice and negotiate and document an agreed exit. If it needs court proceedings, I don’t run those myself and I refer them to my Nexa colleague Alistair Haggerty, who will quote his own fee. Do get in touch.
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation. Law correct as at .
