When a shareholder decides to leave a company and set up as a competitor, the remaining shareholders face one urgent question: can we get those shares back?
This scenario shows why you need to plan for compulsory transfer triggers – legal mechanisms that can force shareholders to sell their shares under specific circumstances.
These provisions don't exist by default, but you can include them in your company's articles of association or shareholders' agreements to protect the business and remaining shareholders.
Compulsory share transfers
There are a number of situations where you might want the ability to require a shareholder to transfer their shares:
- Employment departures: When someone stops working in the business, whether voluntarily or due to circumstances beyond their control like ill health, questions arise about their continued shareholding. Should someone who is no longer contributing to the business retain their ownership stake?
- Breaches and poor behaviour: More contentious situations include shareholders who leave on bad terms, perhaps in breach of their service agreement or shareholders' agreement. This is particularly relevant when someone leaves to work for a competitor or sets up in direct competition with the company.
- Family situations: Another common scenario involves shares that have been gifted to spouses. In the event of separation or divorce, what rights does the transferring shareholder have?
Those scenarios can be addressed in the company's articles of association or shareholders' agreement, but without that, any share transfer will need to be agreed and negotiated.
How to structure the transfer mechanism
If you decide to include compulsory transfer provisions, several key questions need addressing:
Who can buy the shares?
You need to determine who has the right to purchase the departing shareholder's shares. This might be the company itself, the remaining shareholders, or a combination of both.
Most importantly, you must establish ho
Valuation and pricing
w shares will be valued. Should the price depend on the circumstances that triggered the compulsory transfer? For instance, should a shareholder who breaches their service agreement or moves to a competitor receive the same price as someone who had to leave due to illness?
This distinction matters significantly. A "good leaver" who departs due to circumstances beyond their control might reasonably expect full market value for their shares. In contrast, a "bad leaver" who is in default may have a lesser entitlement, but only if specific rules are in place.
Why planning matters
The main message here is simple: suspend your disbelief. You might not think these scenarios will apply to your business, but they happen more often than you expect. The time to plan for these situations is not when they occur, but beforehand, when all shareholders are working well together.
It's much easier to reach consensus on what constitutes reasonable outcomes when relationships are strong and everyone is focused on the business's success. Once conflicts arise or circumstances change, reaching agreement becomes exponentially more difficult.
What should you do
Consider running a "what if?" exercise with your fellow shareholders and legal advisors. Think through various departure scenarios and discuss what outcomes feel fair and reasonable. We can guide you through the questions to consider and support those conversations. Document these decisions in your shareholders' agreement or articles of association when goodwill exists and before any disputes start.
Remember, these provisions don't just protect the business from departing shareholders – they also provide clarity and certainty for everyone involved, including those who might one day need to leave. Clear rules, established in advance, help prevent disputes and make transitions smoother when circumstances change.
By planning ahead, you can protect your business interests and maintain professional relationships, even when business partnerships come to an end.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
