The Default Position: You Cannot Compel a Share Transfer

The default position is that you cannot compel someone to transfer their shares (whether for value or otherwise). In principle this is fair: you cannot deprive someone of their property.

When This Principle Causes Problems

This principle can have unwanted consequences. As an example, three friends set up a company equally as shareholders and directors on the basis they’re all involved in growing the business. After several years of good growth, one of the friends – let’s call him Rupert – decides to resign as a director and pursue another business interest. The remaining two continue to grow the business with a view on a future sale.

It’s not difficult to see how tensions can escalate towards Rupert: he is entitled to dividends equally to the other shareholders, he’ll be entitled to his third share of the company on a sale – though you can hear the rumblings “but he isn’t involved in the business anymore” “he doesn’t contribute”, “we can’t even get hold of him etc”.

What Can the Other Shareholders Do?

What can the other two do? In broad terms (and without the running the gauntlet of the Court), not a lot other than lump it or try to strike a deal with Rupert to buy his shares. Seems a bit unfair but you can’t deprive someone of their property. Reaching a deal is often the best course of action in this scenario.

What Should the Shareholders Have Done Differently?

A shareholders’ agreement and/or articles setting out clear terms detailing the various circumstances whereby a shareholder is compelled to offer their shares to the remaining shareholders and/or the company – the value may be determined by an independent accountant or a set value depending on the circumstances.

The same is true where employee shares are involved- you’ll want to be clear what happens if they leave and what value they should get if they’re a good or bad leaver.

The Best Line of Defence

A properly drafted shareholders agreement with corresponding articles is the best line of defence against future issues like this (and other issues) which proves invaluable when things breakdown. Whilst it’s always great to help clients reach a successful conclusion buying out a shareholder rarely do we end the process without the client wishing they’d have put an agreement in the place in the first place.

For further information, please contact Phil: philipmiles@bexleybeaumont.com | 07388 344576