Shareholder Disputes: Can You Force a Minority Shareholder to Sell?

Shareholder disputes: can you compel an exit?

Shareholder disputes are a common feature of growing businesses. When relations break down, majority shareholders often ask a simple question: can we force the minority to sell?

The short answer is yes, but not without a legal or contractual basis. Share ownership carries a fundamental right to retain those shares unless specific mechanisms apply.
The starting point: contractual rights

The first step in any scenario is to review the company’s articles of association and any shareholders’ agreement.

A well-drafted document will include compulsory transfer provisions, which can require a shareholder to sell their shares in defined circumstances, such as:

• cessation of employment or directorship
• “bad leaver” events
• insolvency
• breach of the shareholders’ agreement
• a sale of the company

Drag-Along Provisions

A drag-along right enables a majority shareholder to force a minority shareholder to join in the sale of a company. This enables the majority shareholder to deliver 100% of the shares in the target company.

A simple way to think about it is co-owning a property. If one owner holds most of the property and agrees to sell it to a buyer, they will usually want to ensure the whole property can be sold as one. Drag-along rights ensure that the smaller co-owner cannot refuse to sell their share and prevent the transaction from completing.

The courts have confirmed that such provisions are enforceable, provided they are properly drafted (see Cunningham v Resourceful Land Ltd [2018]).

Statutory route: Squeeze-out Provision

You may be in a situation where you did not include any compulsory transfer provisions or drag along provisions in your articles of association or shareholders agreement. If so, you are still not left without protection. To implement the statutory “squeeze-out” right and acquire the minority shareholders’ shares in a company, a buyer must structure the acquisition by way of a takeover offer.

Under sections 979–982 of the Companies Act 2006, a buyer can forcibly acquire the remaining shares if certain thresholds are met.

To rely on this:

• there must be a takeover offer (i.e. an offer for all shares, or all shares of a class, on the same terms);
• the buyer must acquire (or contract to acquire):
  • 90% in value of the shares to which the offer related, and
  • 90% of the voting rights carried by those shares

If these thresholds are met, the remaining minority shareholders can be forced to sell on those terms.

Minority protection: sell-out rights

Minority shareholders are not completely without protection under the Act. In the case of a company sale Section 983 of the Companies Act 2006, grants “sell-out rights” to minority shareholders, which means that their shares must be bought on the same terms as those of the majority.

Court intervention: unfair prejudice petitions

As a general rule, the courts are reluctant to force a shareholder to sell.

In certain circumstances, a shareholder may bring an unfair prejudice petition under Section 994 of the Companies Act 2006.

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.

How can we help?

• Drafting and reviewing shareholders’ agreements and articles of association
• Advising on the enforceability of drag-along and compulsory transfer provisions
• Structuring and implementing company sales and takeovers
• Advising on squeeze-out and sell-out rights under the Companies Act 2006
• Assisting with shareholder disputes, including unfair prejudice claims

If you are facing a shareholder dispute or considering how to structure your company to avoid one, we can provide clear, commercially focused advice tailored to your situation.

If you want to get in touch, reach out to Andrew Gordon.