As a business owner, you may need to force a shareholder to sell their shares. This can arise when you have received an offer to sell your company or when the shareholder fails to meet specific standards. Forcing existing shareholders out of your company can be very challenging. This article will explore what your company’s shareholders agreement should address so that you can enforce a share sale.
Drag Along Rights
You may be selling your company to a third party on the condition that they acquire all your business’ shares. If your shareholders agreement permits it, you may be able to exercise certain rights, such as your “drag along” provisions.
The drag along provisions in your shareholders agreement allows you to prevent minority shareholders from blocking a share sale. If you obtain the threshold percentage of shareholders supporting the share sale, the shareholder majority can force the minority to sell their shares to the third party.
Generally, you must ensure the offer to purchase the minority’s shares is on terms no less favourable than those accepted by the shareholder majority.
Vesting
To attract and retain talented individuals for your company and help develop your vision, you may have established an Employee Share Scheme (ESS) or Employee Share Option Plan (ESOP). In such cases, your ESS or ESOP plan rules will often make an employee’s ESS shares or ESOP options subject to vesting provisions. Under these circumstances, you have the option to acquire or transfer your employee’s unvested shares in specific situations. These may include their departure from the company within a designated time frame or a violation of their employment agreement.
Continue reading this article below the formEvents of Default
Your shareholders agreement will likely contain a list of events that constitute events of default. If one of your shareholders commits an event of default, you will be able to force that defaulting shareholder to sell or transfer their shares.
There are two broad categories of events of default, characterised by their nature. Firstly, more egregious events trigger a right for your company to purchase the defaulting shareholder’s shares. Specifically, a predetermined percentage will be applied to the market share price, resulting in a reduced buyout value to your shareholder. Secondly, less egregious events trigger the right for your company to purchase the defaulting shareholder’s shares at market value.
The table below outlines common events of default that your shareholders agreement may cover.
Type One: Discount to Market Value | Type Two: Market Value |
Material Breach – the shareholder commits a material breach of a term in the SHA. | Change in Law – a shareholder becomes prohibited from being a shareholder due to a change in law. |
Serious Misconduct or Fraud – the shareholder commits an act of fraud, dishonesty or serious misconduct that the other shareholders believe will cause significant reputational damage to the company. | Insolvency – the shareholder experiences an insolvency event. |
Disposal of Shares – a shareholder transfers shares in breach of the shareholder agreement’s pre-emptive provisions. | Good Leaver – an employee shareholder leaves the company and is not a bad leaver (e.g. accepts an external job offer). |
Change in Control – the shareholding or control mechanisms of the company change where the shareholder is a company. | Death or Incapacity – the shareholder dies or becomes permanently incapable of managing their own affairs. |
Bad Leaver – an employee with vested or unvested shares has their employment terminated. This is because they have breached their employment agreement, committed an act of fraud, or been convicted of a criminal offence. |

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What Happens if an Employee Refuses to Sell Their Shares?
Despite having the right to compel a shareholder to sell or transfer their shares, they may still refuse to cooperate. In such a situation, you can utilise the power of attorney. This should be granted to you in your company’s shareholders agreement or ESOP rules (if any).
Typically, a power of attorney provision will make each of your company’s directors a power of attorney for each shareholder. The attorney can act on a shareholder’s behalf to take the necessary actions to sell or transfer their shares. However, a power of attorney can only be used to enforce a sale or transfer of a shareholder’s shares. This is aligned with the specific powers set out in the shareholders agreement or ESOP plan rules. Accordingly, it is important to note that this is not an ultimate power to force share sales.
Key Takeaways
Your shareholders agreement may allow for certain situations where you can force one of your shareholders to sell or transfer some or all of their shares. These include:
- “drag along” rights which enable majority shareholders to force the minority to sell shares to a third party, often requiring a 75% threshold;
- vesting provisions in ESS or ESOP, which allow the acquisition or transfer of unvested shares based on specific circumstances; and
- events of default where certain shareholder actions trigger the right to purchase shares at a discounted or market value.
If your shareholder refuses to sell despite having the right, your company can use a power of attorney. Directors can enforce a sale, following specific powers outlined in the shareholders agreement or ESOP rules.
If you would like to discuss how to force a shareholder to relinquish their shares or need assistance drafting a shareholders agreement, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
Can I force a sale via a “share buy-back”?
No. You cannot force an employee to participate in a share buy-back. A shareholder also cannot force your company to repurchase its shares via a share buy-back.
What can I do if a shareholder keeps holding up shareholder resolutions?
If you circulate a written resolution to your shareholders, you must get each shareholder to sign the resolution. Alternatively, you can obtain the quorum specified in your shareholders agreement or company’s constitution. This will enable you to pass a shareholder’s resolution without the delaying shareholder being present and voting if they choose not to attend.
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