How to force a shareholder to sell their shares?

In principle, shareholders cannot be forced to sell their shares. Ownership of shares constitutes private property, and the shareholder retains control over whether and when to sell. Conversely, no one can compel you to sell your shares. This holds true even in situations where personal conflicts arise, and one party wishes to see the other shareholder removed from the company.

However, there are specific circumstances where forcing a sale may become a possibility, as outlined below:

1. Major Breach of the Shareholders' Agreement

A material breach of the shareholders' agreement can sometimes trigger an obligation for the breaching party to sell their shares, often at a significant discount. In extreme cases, the sale may occur at a token value, effectively forfeiting the shares. Common breaches include sharing business secrets, violating confidentiality agreements, acting disloyally, breaching non-compete clauses, or failing to adhere to governance protocols.

2. Vesting Provisions and Unvested Shares

When shares are subject to vesting, a shareholder who fails to meet the agreed terms (e.g., continued employment) may be obligated to sell back their unvested shares. Such shares are often bought back at nominal value, as they were conditioned on the shareholder fulfilling specific obligations.

3. Sale/Purchase Right: The Shotgun Provision

A shotgun clause is a pre-agreed mechanism designed to resolve deadlocks between shareholders. While it does not directly force a sale, it allows one party to initiate a separation. The triggering party sets a price for the shares, and the counterparty can choose to either sell their shares at that price or buy the triggering party’s shares.

4. General Call Option

A call option grants one party the right to purchase shares at a pre-determined price or based on an agreed formula. Call options are often used for financial structuring, control mechanisms, or as part of secondary transactions.

While shareholding is fundamentally a matter of personal property rights, mechanisms such as those outlined above allow for forced sales under specific conditions. These tools must be carefully designed, clearly defined, and fairly applied to balance shareholder interests and prevent misuse. Consulting with legal professionals and crafting detailed agreements can help ensure these provisions serve their intended purposes effectively.

For a more detailed explanation of the abovementioned methods along with the full list check out Kat's article here.