Sample Exit Clause – Partnership Agreement
Clause X: Partner Exit and Transfer of Interest
Notice of Intent to Exit
Any Partner wishing to exit the Partnership must give written notice to all other Partners specifying the intended exit date, which shall be no less than 60 days from the date of notice.
Right of First Refusal
Before transferring their interest to any third party, the exiting Partner must first offer their interest to the remaining Partners at a price determined by an independent chartered accountant agreed by all Partners.
The remaining Partners shall have 30 days from receipt of the offer to accept or decline.
Valuation and Payment Terms
The value of the exiting Partner’s interest shall be determined based on the latest audited accounts, adjusted for any material changes up to the exit date.
Payment shall be made in full within 30 days of completion, unless otherwise agreed in writing.
Approval of Third-Party Transfers
If the remaining Partners decline the offer, the exiting Partner may transfer their interest to a third party, subject to the unanimous written approval of the remaining Partners.
Approval shall not be unreasonably withheld, but may be refused if the proposed transferee is a competitor or has a conflict of interest.
Restrictions and Confidentiality
The exiting Partner shall not, for a period of 12 months following exit, solicit clients or employees of the Partnership, nor disclose confidential information.
Dispute Resolution
Any dispute regarding valuation, approval, or terms of exit shall be referred to mediation, and if unresolved, to expert determination by an independent accountant.
Sample Exit Clause – Shareholders Agreement
Clause Y: Shareholder Exit and Share Transfer
Notice of Proposed Transfer
Any Shareholder wishing to transfer shares must give written notice to the Board, specifying the number of shares and proposed transferee.
Right of First Refusal
The Company and/or existing Shareholders shall have the right to purchase the shares on the same terms as offered to the third party, within 30 days of notice.
Board Approval
No transfer shall take place without prior written consent of the Board, which shall not be unreasonably withheld. The Board must respond within 14 days of notice.
Valuation Mechanism
If the price is disputed, an independent valuer (chartered accountant) shall determine fair market value, using the most recent audited accounts and agreed valuation methodology (e.g., EBITDA multiple).
Drag-Along and Tag-Along Rights
If a majority Shareholder accepts an offer for their shares, minority Shareholders may be required to sell (drag-along) or may elect to join the sale (tag-along) on the same terms.
Deadlock and Compulsory Purchase
In the event of a deadlock, any Shareholder may serve notice requiring the other Shareholders to purchase their shares at a price determined by an independent accountant, with completion within 60 days.
Restrictions and Confidentiality
Transferees must sign a deed of adherence to this agreement. Outgoing Shareholders must not compete or disclose confidential information for 12 months post-transfer.
Dispute Resolution
Any dispute regarding transfer, valuation, or approval shall be referred to mediation, and if unresolved, to expert determination.
Introduction
Exit clauses are the backbone of any well-drafted shareholders or partnership agreement. They determine how parties can leave, sell, or transfer their interests, and what happens if relationships break down or strategic opportunities arise. Whether you’re a partner wanting approval for a share sale, a shareholder seeking a buyout, or a business owner considering a merger, the structure and wording of exit clauses can make or break your deal—and protect you from costly disputes.
2. Why Exit Clauses Matter: Real-World Risks and Judicial Scrutiny
The recent case of Saxon Woods Investments Limited v Costa (Royal Courts of Justice, June 2025) illustrates how unclear or contested exit terms can escalate to litigation. In that case, the Court of Appeal examined whether a shareholder could force a sale or block a transfer, and how the agreement’s wording affected the parties’ rights. The judges scrutinised the process for approving sales, the valuation mechanism, and the fairness of restrictions—reminding all business owners that vague or one-sided clauses can be challenged and, if necessary, reinterpreted by the courts.
3. Types of Exit Clauses: Tailoring to Your Business and Goals
Exit clauses vary depending on the business structure and the parties’ objectives. Key types include:
Right of First Refusal (ROFR): Requires a selling partner or shareholder to offer their interest to existing parties before selling to outsiders.
Example: In a two-person partnership, one party must give the other the chance to buy their shares before approaching external buyers.Drag-Along and Tag-Along Rights:
Drag-along allows majority owners to force minority shareholders to sell if a third party acquires the business.
Tag-along protects minority shareholders by letting them join any sale initiated by the majority.
Buyout/Compulsory Purchase Clauses: Set out when and how a party can be forced to sell (e.g., on retirement, death, incapacity, or breach).
Example: A partnership agreement may require a departing partner’s shares to be valued and bought by the remaining partners.Approval/Consent Clauses: Require board or partner approval for any sale or transfer, often with a defined process and timeline.
Example: A shareholder wishing to sell must obtain written consent from the board, with refusal only allowed on specified grounds.Merger and Acquisition Provisions: Address what happens if the whole business is acquired or merged, including how proceeds are distributed and who must approve the deal.
4. Practical Steps for Drafting and Enforcing Exit Clauses
Define Clear Triggers: Specify what events allow or require an exit—voluntary sale, retirement, death, incapacity, deadlock, or external acquisition.
Set Out Approval Processes: Detail how consent is sought, what information must be provided, and how long parties have to respond.
Valuation Mechanisms: Use independent valuation, formula-based approaches (e.g., EBITDA multiples), or pre-agreed price bands.
Tip: Avoid vague “fair value” wording—courts may need to interpret it, as in Saxon Woods v Costa.Payment Terms: Clarify timing, instalments, and any security for deferred payments.
Restrictions and Protections: Consider non-compete, confidentiality, and restrictions on transfers to competitors.
5. Differences for Partnerships vs. Companies
Partnerships:
Often more personal, with exit clauses focused on protecting the ongoing business and remaining partners.
May include “good leaver” and “bad leaver” provisions, with different valuation and payment terms.
Approval for sales is usually by unanimous or majority partner vote.
Companies (Shareholders Agreements):
More formal, with board or shareholder approval processes.
Drag/tag-along rights are common, especially in venture-backed businesses.
Minority protections and dispute resolution clauses are essential.
6. Sample Clauses and Commentary
Right of First Refusal (ROFR) Sample:
“If any Partner wishes to sell their interest, they must first offer it to the remaining Partners at a price determined by an independent valuer. The remaining Partners shall have 30 days to accept the offer.”
Approval Clause Sample:
“No Shareholder may transfer shares without the prior written consent of the Board, which shall not be unreasonably withheld. If consent is refused, the Board must provide written reasons within 14 days.”
Buyout on Deadlock Sample:
“In the event of a deadlock, either party may serve notice requiring the other to purchase their shares at a price determined by an independent accountant, with completion within 60 days.”
7. Navigating Acquisitions and Mergers
If a full acquisition or merger is contemplated, exit clauses should address:
Who must approve the transaction (board, shareholders, partners).
How proceeds are allocated (pro rata, preference shares, waterfall).
What happens to minority interests and dissenting parties.
Any rights to challenge or block the deal.
8. Resolving Disputes: Negotiation, Mediation, and Litigation
Start with negotiation and, if needed, mediation—refer to dispute resolution clauses.
If parties cannot agree, courts will interpret the agreement, as in Saxon Woods v Costa, considering fairness, commercial context, and the parties’ conduct.
Keep all correspondence, valuations, and board minutes as evidence.
9. Conclusion
Exit clauses are not just boilerplate—they are the safety net for business owners, partners, and shareholders. Whether you’re planning a sale, buyout, or merger, invest time in drafting clear, fair, and enforceable terms. If a dispute arises, act quickly, seek independent advice, and be prepared for judicial scrutiny. A well-crafted exit clause can save you from years of uncertainty and litigation.
Disclaimer:
This material is for general information only and does not constitute medical, financial, tax, or legal advice. For guidance on your specific situation, consult a qualified professional.
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