A shareholder cannot typically force another shareholder to sell their shares unless there is a contractual obligation entitling them to do so. For example, if there is a provision enabling such a sale in the company’s Articles of Association, Shareholder Agreement or another valid contract.
Usually, the more effective way of purchasing a shareholder’s shares is to negotiate with the shareholder whose shares you would like to purchase. A share sale can be done via a share transfer agreement, where the shareholders buy the other shareholder’s shares, or it can be done through a company buy-back, where the shares will go back to the company.
If the shareholders who want the sale to go ahead have a majority shareholding (i.e., 75% of the shares), they could consider passing a special resolution to alter the company’s Articles of Association to include provisions to force a sale of the shares. This sale would usually be a sale at fair value and often there is a calculation within the Articles of Association to determine how the valuation should be calculated.
However, a minority shareholder has the right to apply to the court claiming ‘unfair prejudice’. An unfair prejudice petition from a minority shareholder is usually brought against the other shareholders personally and they will usually have to use their own funds to defend such an action.
Where the amendments to the Articles of Association have been found by a court to have been made in good faith and in the interests of the company, it has followed that the court has not found that the amendments have been unfairly prejudicial to a minority shareholder. However, if the motive for changing the Articles is improper and not in the best interests of the company, then it is likely the minority shareholder will be able to challenge the change. Even if the amendment adversely affects or is intended to affect a minority shareholder, it may still be valid, providing that the amendment is made in good faith and in the interests of the company.
Whether or not the change is a benefit to the company will depend on whether a reasonable person would consider it to be in the interests of the company. In recent case law, judges have found that changes to the Articles of Association that allow majority shareholders to buy out minority shareholders are not unfairly prejudicial. However, it is important to be aware that in these leading cases, the rights were not being introduced for the first time. What the majority shareholders had sought to do was a tidying up exercise to enable clarity and consistency across the Articles of Association. If such rights were being introduced for the first time, then it is perhaps more likely that a minority shareholder would be successful in a claim for unfair prejudicial conduct.
To avoid litigation, particularly litigation that is brought against shareholders personally, we stress that the preferred course of action is almost always to negotiate with the other party and avoid any such claims being made. If shareholders do make any changes to the Articles of Association, they need to consider their reasons for doing so carefully and to ensure any decisions are recorded in the minutes passing the special resolution.
For further information on any matters raised in this article or any related queries, please contact us on 0345 646 0406 or fill in our online enquiry form and a member of our team will be in touch.