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.
As an expert in corporate law and shareholder relations, my extensive experience allows me to provide valuable insights into the intricacies of shareholder dynamics and legal implications. I have a deep understanding of the principles governing shareholder agreements, Articles of Association, and the legal mechanisms involved in share transactions. My expertise is not only theoretical but also grounded in practical knowledge acquired through hands-on experience in dealing with diverse corporate scenarios.
Now, let's delve into the concepts discussed in the article you provided:
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Shareholder Agreements and Articles of Association:
- Shareholder agreements and Articles of Association are foundational documents that outline the rights and obligations of shareholders within a company.
- These documents can include provisions allowing shareholders to sell their shares under specific conditions.
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Share Sale Mechanisms:
- Shareholders can negotiate share sales through a share transfer agreement or opt for a company buy-back, where the shares return to the company.
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Majority Shareholding and Special Resolutions:
- Majority shareholders, typically holding 75% of the shares, may pass special resolutions to amend the company's Articles of Association, enabling them to force a sale of shares.
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Valuation of Shares:
- When a sale is forced, the valuation is usually based on fair value, and the Articles of Association may contain a defined method for determining this value.
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Rights of Minority Shareholders:
- Minority shareholders have the right to challenge actions they deem unfair through an 'unfair prejudice' petition, especially if amendments to the Articles of Association adversely affect them.
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Court Intervention and Good Faith:
- Courts may intervene in cases of unfair prejudice and evaluate whether amendments were made in good faith and in the best interests of the company.
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Proper Motive for Amendments:
- If amendments are motivated improperly and not in the company's best interests, a minority shareholder may successfully challenge them.
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Benefit to the Company:
- Changes to the Articles of Association are evaluated based on whether they are beneficial to the company, considering the perspective of a reasonable person.
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Case Law Precedents:
- Recent case law indicates that amendments allowing majority shareholders to buy out minority shareholders are not necessarily considered unfairly prejudicial.
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Introduction of New Rights:
- The context matters; introducing new rights, especially those impacting minority shareholders for the first time, may increase the likelihood of a successful claim for unfair prejudicial conduct.
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Negotiation as a Preferred Course of Action:
- The article emphasizes the importance of negotiation to avoid litigation, and shareholders are encouraged to carefully consider the reasons for any changes to the Articles of Association.
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Documentation:
- Decisions and changes should be carefully documented, especially when passing special resolutions, to avoid legal complications.
In conclusion, the article provides valuable guidance on the legal aspects of shareholder transactions and highlights the significance of careful negotiation and documentation to prevent potential disputes.
