328 9 Exit of Different Classes of Investors
9.4 Exit of Shareholders
The exit of a shareholder in his capacity as shareholder depends on the business
form of the firm. While there is a large body of company law rules on the exit of
shareholders, the parties have more discretion in partnerships.
Shareholders can exit a limited-liability company in many ways. Funds can be
paid either by the company (distributions, share buy-backs, withdrawal or redemp-
tion of shares, liquidation) or by a third party (sale of shares, public offerings, the
use of a sell-out or squeeze-out right, share exchanges, consideration in the con-
text of a merger or a division). The company will either continue to exist as a legal
person or cease to exist (liquidation, merger, division). If the company continues
to exist as a legal person, the shareholder’s shares will either continue to exist
(sale, share exchanges, share buy-backs) or will cease to exist (withdrawal of
shares).
A shareholder can simultaneously be an asset investor and/or a debt investor.
For example, a shareholder might personally own part of the core assets of the
firm such as intellectual property rights (patents, trademarks) or real estate. If the
firm is successful, the value of those assets might increase. The shareholder might
then exit the firm in the capacity of asset investor by selling those assets to the
company or a third party. As shareholders are residual claimants, a shareholder
can sometimes mitigate risk by using debt instruments. The firm must repay its
debts even in the absence of distributable profits.