Can Minority Shareholders be Forced to Sell Their Shares?

If you are a minority shareholder in a company you cannot be forced to sell your shares against your will, unless one of the following scenarios applies.

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Drag-Along Rights

If the company’s articles of association or a Shareholder Agreement, contain drag-along rights, a majority shareholder (or a group of shareholders) can require minority shareholders to sell their shares, if a third party is buying the company.

This is designed to ensure a smooth sale of the company.

Drag along clauses will set out the size of the majority necessary to compel the minority to sell and should outline the valuation mechanism for individual shareholders stakes in the company.

If there is a takeover offer that complies with the Companies Act 2006 definition of “Squeeze Out”

Under the Squeeze Out provisions set out in Sections 979 to 982 of the Companies Act 2006, if a buyer acquires 90% or more of the shares in a takeover, the remaining 10% (or less) of shareholders can be forced to sell their shares.

However, minority shareholders are not completely without protection under the Act. In the case of a company sale Section 983 of the Act, grants “sell-out rights” to minority shareholders, which means that their shares must be bought on the same terms as those of the majority.

Compulsory Share Transfers Clauses in a Company’s Articles of Association or Shareholder Agreement

Some companies include clauses in their Articles of Association or shareholder agreements that require a shareholder to sell their shares in specific situations, such as:

If they cease to be a director, whether they have been dismissed or chosen to leave. Such clauses are typically agreed upon when the shares are first issued or when a director becomes a shareholder. The terms often specify that the departing director must sell their shares either back to the company, to remaining shareholders, or to a pre-approved buyer, usually at a “fair” or market value.

If they leave employment, most likely if shares have been awarded as remuneration for working for the company

If they become insolvent or commit a serious breach of the shareholder agreement.

If there is a takeover offer to buy the company.

According to Sections 975 to 978 of the Companies Act 2006 a “takeover offer” is an offer to buy all of the shares or at least all of a certain class of shares within a company where the price offered is the same for all of the shares or class of shares.

Court-Ordered Buyout under an Unfair Prejudice Petition

If there is a shareholder dispute, a court can order a forced buyout under a petition under Section 994 of the Companies Act 2006, called an Unfair Prejudice Petition. Although the court is allowed a wide discretion to grant an appropriate remedy under such a petition, the usual order is for one side’s shares to be bought by the other at a “fair” price.

Such a remedy though, is usually granted to a minority shareholder or a 50% shareholder, who wishes to leave the company on the basis of receiving the full value for their shares, having shown that their the company has been run is a way that is “unfair” and “prejudicial” to their interests.

It is possible for a majority shareholder to claim unfair and prejudicial conduct at the hands of a minority shareholder and so be granted an order that the minority shareholder must sell their shares to them. However, such an order is rare.

For the court to order a minority to sell their shares to a majority under an Unfair Prejudice Petition, the minority shareholder will have had to have been granted the power to control the company either in the articles of association and/or shareholder agreement and has abused that power.

Challenging a Forced Sale?

Courts are generally reluctant to compel minority shareholders to sell their shares unless there are explicit provisions for forced sales outlined in the company’s constitution (Articles of Association) or a binding shareholder agreement. Forcing a sale without a clear legal or statutory basis to do so will always be looked upon unfavourably by the courts.

Changing the Company’s Articles of Association

The majority shareholder has the power to change the company’s articles of association. If they hold at least 75% of the shares, they can pass a special resolution to amend the articles, potentially adding clauses that require minority shareholders to sell their shares—typically at a fair market price. However, such amendments will face strict scrutiny by the courts

Changes to the articles cannot unfairly prejudice minority shareholders and the law provides robust protections to ensure their rights are upheld. If the proposed changes are unjust, minority shareholders can challenge them in court.

The courts will carefully review whether the amendments were made fairly, with proper notice and approval, and whether they respect the interests of all shareholders.

Can minority shareholders be forced to sell

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