When an owner tells you they want out, the immediate question is not "how do we buy them out?" but "what mechanism does the law actually put in motion?" The answer depends almost entirely on two things: whether the business is a company or a partnership, and what the owners have agreed in writing. In a company the business is a separate legal entity, so an owner's departure is a matter of transferring shares and updating records. In a partnership the owners are the business, so a departure can dissolve the partnership itself unless the agreement provides otherwise.
This article walks through the exit mechanism in each structure: the documents that control it, who does what at each step, and where owners commonly get caught out. If a shareholder or partner in your business is leaving, this is the process you are about to enter.
The documents that control the exit
Whatever the structure, an owner's departure is governed by three layers of rules. The first is the agreement between the owners themselves: the partnership agreement, or the shareholders agreement for a company. The second is the entity's governing rules: for a company, its constitution or, failing that, the replaceable rules in the Corporations Act 2001 (Cth); for a partnership, the state or territory partnership legislation that supplies the default position when no agreement exists. The third layer is the Corporations Act's administrative obligations, mainly the lodgements a company must make with the Australian Securities and Investments Commission (ASIC), which apply no matter what the owners have agreed.
The cast of players is small, and each has a distinct role:
- The departing owner: gives notice of departure and, in a company, finds a buyer and signs the transfer.
- The remaining owners: exercise first-refusal rights, approve any incoming owner, or buy the departing interest themselves.
- The board (in a company): decides whether to register the transfer of shares.
- ASIC: receives the lodgements that keep the company's public record accurate.
- The ATO: holds the partnership's ABN and tax registrations, which must be updated when the partners change.
Partnership exits: notice, dissolution and continuation
In a partnership, the departure of an owner is a bigger event than in a company, because the partners are the business. The exit mechanism turns on one trigger: notice.
The default position: dissolution by notice
If there is no partnership agreement, or the agreement is silent, the default rules come from partnership legislation. Section 32 of the Partnership Act 1892 (NSW) is typical of the equivalent provisions in every state and territory. Subject to any agreement between the partners, a partnership entered into for an undefined time is dissolved by any partner giving notice to the others of their intention to dissolve it. The dissolution takes effect from the date stated in the notice, or if no date is stated, from the date the notice is communicated.
The consequence is significant: one partner's notice can end the entire partnership, not just that partner's involvement. Where only two partners exist, the departure of one is a dissolution, and the business must be wound up: accounts taken, assets distributed, and liabilities discharged in accordance with the agreement or the legislation. This is why a written partnership agreement that deals with retirement is not a formality. It is the difference between a planned buy-out and a forced wind-up.
When the agreement changes the picture
Section 32 is expressly "subject to any agreement between the partners". A well-drafted partnership agreement can replace the default mechanism with a retirement process: a notice period, a formula or valuation method for the departing partner's interest, payment terms, restraints on the departing partner, and a mechanism for the remaining partners to continue the business. The agreement can also provide for a deed of retirement or a buy-out deed that records the terms and gives effect to the change.
Dissolution versus a reconstituted partnership
Where the agreement (or the remaining partners' decision) provides for the business to continue, the old partnership is technically dissolved and the business carries on as a reconstituted partnership. Practitioners sometimes call this a technical dissolution. The day-to-day running of the business does not stop: the assets and liabilities are taken over by the continuing partners without a break in trading. Because the business itself continues, in practice the partnership's ABN and other registrations can usually remain in place, but the ATO should be advised of the change in partners, and your adviser should confirm what needs to be updated before you rely on this.
Who gets to be the new partner
A departing partner cannot simply hand their place to a buyer. Section 24(7) of the Partnership Act 1892 (NSW) provides that no person may be introduced as a partner without the consent of all existing partners. Nor does assigning the departing partner's interest achieve it: under s 31, an assignee of a partner's share is entitled only to receive the share of profits, with no right to interfere in management, require accounts, or inspect the partnership books. In other words, even a partner who has found a buyer cannot force that person into the partnership. The remaining partners control who joins, and the departing partner's exit is a buy-out or a dissolution, not a substitution.
Company exits: the share transfer process
A company is a separate legal entity, and its owners hold shares in it rather than owning the business directly. This changes the exit mechanism fundamentally. The company continues to operate no matter who holds the shares, provided it keeps at least one shareholder (see s 6 of the Corporations Act 2001 (Cth), the small business guide) and at least one director who ordinarily resides in Australia (s 201A of the Act). The mechanism for an owner's departure is the transfer of shares, and it runs in five steps.
Step 1: The trigger and pre-emptive rights
Most shareholders agreements and constitutions require a departing shareholder to offer their shares to the existing shareholders first, before offering them to anyone outside the company. These are called pre-emptive rights, and they are usually paired with a requirement that the board consent to any transfer. It is worth being precise about where these restrictions come from: they are not part of the Corporations Act's default rules. If the company has no shareholders agreement and no constitution with these terms, nothing in the replaceable rules stops a shareholder from selling to an outsider. The board still controls registration (step 3), but it cannot veto a sale that the rules do not restrict.
Step 2: The transfer instrument
A share transfer is not effective by handshake or payment. Under s 1071B of the Corporations Act 2001 (Cth), the company must only register a transfer if a proper instrument of transfer has been delivered to it. The transferor signs the instrument, and the transferee usually executes it as well. The instrument records the consideration, the shares being transferred and the parties. Until that instrument is delivered and registered, nothing has changed.
Step 3: The directors' decision to register
Registration is the board's decision. Under the replaceable rules in s 1072F and s 1072G of the Corporations Act 2001 (Cth), the directors of a proprietary company may refuse to register a transfer for any reason. They are not required to register one unless the transfer instrument and any share certificate have been lodged at the registered office, any registration fee has been paid, and any further information the directors reasonably require has been provided. The directors may also refuse to register where shares are not fully paid or the company has a lien over them.
The timing point matters: under s 1072F, a person transferring shares remains the holder until the transfer is registered and the new holder's name is entered in the register of members. Dividends, voting rights and liability for unpaid amounts stay with the seller in the meantime. A company's constitution commonly replaces these default rules with a stricter regime, so the actual test is whatever the constitution says.
If the directors refuse to register, the dispute does not end there. Section 1071F of the Act lets the would-be buyer apply to a court, which can order that the transfer be registered, or make other orders including that the shares be bought by a specified member or by the company itself.
Step 4: Registration and records
Once the transfer is approved, it is entered in the register of members, which the Act requires the company to keep and maintain (ss 168-169 of the Corporations Act 2001 (Cth)). The register records the new holder's name and address, the date of entry, and the number and class of shares held. If paper share certificates were issued, they are prima facie evidence of title under s 1070C, so any certificate covering the transferred shares must be cancelled or updated once the transfer is registered.
Step 5: ASIC lodgements
A departure generates paperwork that the owners cannot contract out of. A proprietary company must notify ASIC of changes to its register of members, including the addition or removal of a member and changes to the number of shares held, within 28 days of making the change (ss 178A and 178D of the Corporations Act 2001 (Cth)). Companies with more than 20 members only need to notify changes affecting their top 20 members in a class. If the departing owner is also a director, the company must lodge notice of the cessation of their directorship with ASIC within 28 days (s 205B). And if the company issues new shares rather than transferring existing ones, the issue must be notified within 28 days (s 254X). These notification obligations are strict liability offences: a missed deadline attracts penalties without any need to prove fault.
When nobody wants to buy: buy-backs and staying put
If the remaining shareholders cannot or will not buy the departing interest, and pre-emptive rights do not produce a buyer, the company itself can buy back the shares. Under s 257A of the Corporations Act 2001 (Cth), a company may buy back its own shares provided the buy-back does not materially prejudice the company's ability to pay its creditors and the procedures in Part 2J.1 are followed. A selective buy-back, which is the type used to buy out one shareholder's holding, requires a special or unanimous resolution of the shareholders (s 257B). The shares are cancelled once bought back (s 257H), and the cancellation must be notified to ASIC (s 254Y).
Where no buyer emerges and a buy-back is not viable, the departing shareholder simply remains on the register. They keep their rights, including dividends and voting, until a transfer is registered. That is not a failure of process; it is the default outcome when the shares have no buyer, and it is often what actually happens in small companies with no exit provisions.
Where exits commonly go wrong
Exits that turn into disputes tend to share one of the following features:
- No shareholders agreement: with no pre-emptive rights in place, a departing shareholder can sell to any outsider, and the remaining owners' only lever is the directors' power to refuse registration, which may be limited if the constitution is silent.
- An unregistered transfer: if the buyer pays but the transfer is never registered, the seller remains the legal holder (s 1072F of the Corporations Act 2001 (Cth)). Dividends, voting and liability continue to attach to the seller, and the company that acts on the unregistered sale is exposed.
- Missed ASIC deadlines: the 28-day lodgement windows in ss 178A, 205B and 254X carry strict liability penalties. Departures usually coincide with other disruption, which is exactly when these filings get forgotten.
- A partnership that just carries on: where two partners exist and one gives notice, the partnership dissolves even if both want the business to continue. Trading through a dissolved partnership creates real uncertainty about authority and liability.
- Assuming a replacement is automatic: a new partner needs the consent of all existing partners (s 24(7) of the Partnership Act 1892 (NSW)), and an assignee of a departing partner's interest is not a partner at all (s 31).
- Tax and duty overlooked: the departing owner will usually face capital gains tax on the disposal of their shares or partnership interest, and share transfers can attract transfer duty in some states depending on the consideration and the state's rules. Confirm the position with a tax adviser before settlement, and update the partnership's ABN and registrations with the ATO.
When to bring in a lawyer
The highest-value work happens before anyone leaves. A lawyer drafting the exit provisions in a shareholders agreement or partnership agreement controls most of what we have described: pre-emptive rights, the valuation method (whether an agreed formula or an independent valuation), good leaver and bad leaver distinctions, restraints on departing owners, and deadlock resolution. These clauses turn a potentially destructive departure into a mechanical process.
Once a departure is underway, a lawyer runs the sequence: negotiating and documenting the transfer or buy-out, preparing the deed of retirement or dissolution for a partnership, drafting the resolution required for a selective buy-back, and managing the ASIC lodgements so the deadlines are met. Where the process breaks down, the same advisers handle the disputes: the court application under s 1071F when a transfer is refused, and broader claims such as oppressive conduct where a minority owner is being squeezed out.
Agree the exit before anyone leaves
The most expensive version of this situation is not the shareholder who cannot find a buyer. It is the partnership dissolved by a single notice when nobody actually wanted to wind the business up, and the company where a departing shareholder sold to an outsider because nothing in the rules stopped them. Both are the product of the same gap: no written exit terms agreed while the owners still got along. If a departure is already in motion, the mechanism is still manageable, but it is sequential and time-limited, with 28-day lodgement windows running from the moment the register changes. Getting a lawyer in early, whether to draft the agreement that prevents the problem or to run the process once it starts, is usually far cheaper than unpicking an unregistered transfer or a dissolved partnership later.