In this article, we will look at majority and minority shareholders and answer the questions “Can a majority shareholder force a minority shareholder to sell?” and “how can a minority shareholder be forced to sell its shares?” A minority shareholder is someone who owns less than half of a company, meaning they do not hold the majority of the power. There are some ways that a majority shareholder can force a minority to sell, but the minority shareholder also has protections of their own.
One of the most common ways that a majority shareholder will be able to force out a minority shareholder is through various elements within their shareholder agreement. When signing a shareholder agreement, it is important to keep in mind that every company will have their own agreement, with different language and clauses within the agreement that could directly help or hinder the shareholder. Here, we will briefly break down just some of what you should look out for in a shareholder agreement in regards to forcing out a minority shareholder. For more on minority shareholder agreements, see What are Minority Shareholders?
Buy-Sell agreements or “forced buyouts” are one way for the majority to force out a minority. This allows a majority to force a minority to sell their shares often in the context of a company-wide buyout. These are not entirely bad for minority shareholders, though, and are often vital in any strong shareholders agreement so long as the terms of sale that are agreed to are fair.
Strong Buy-Sell Agreements will set either a pre-determined buyout price or a fair means of settling on a price in the future. If there is a buy-sell agreement within a shareholder agreement, the majority shareholder will have the right to immediately buy out the share of a minority and either distribute it to either the company itself or other shareholders.
Drag-Along or Bring-Along provisions allow a majority shareholder to “bring along” the minority shareholders when the company is being sold to a third party. When a sale is approved by the board of directors, they will settle on a deal which will determine what to pay shareholders. If there is a Drag-Along provision in the shareholder’s agreement, the company will be able to sell 100% of their shares, even if the minority shareholders do not agree to the sale.
This protects the company from having a sale blocked by a small minority holdout which could deter the buyer, but it can also be negative for a minority shareholder who is put in a tough situation to either go along with the sale or sell off their shares. However, drag-along provisions can also be viewed as a potential good thing. If a company is bought out and they have a drag-along provision, they will not be able to leave the minority shareholders out of the sale.
If there is no language within the shareholder agreement that relates to forcing to sell a minority shareholder, another option is to buy out a minority shareholder. The best way to do that is offer them a strong buyout price that will remove any monetary gain from holding on to the shares. If they shareholder is holding out from selling because of the monetary value, this is the best route as it makes it less financially reasonable for the shareholder to keep their shares. The conflicts that may arise here are debates over what is a fair price and the possibility of a shareholder keeping their shares for reasons other than financial. Perhaps being a shareholder is granting them privileges or prestige they would otherwise lose or perhaps they believe the company is on the verge of a rise that will soon increase the value or power of their shares.
When attempting to convince a minority shareholder to sell when they are refusing to pay a fair price, majority shareholders will often reach out to other means. These can include blocking all the decisions that minority shareholder is making, slowing down their process of requests, or even firing them as an employee. In this situation, it is important for both parties to be aware of a legal concept called Oppression of the Minority Shareholder. In short, these are laws that protect the interests of minority shareholders from being abused by majority shareholders. Illinois is an especially shareholder-friendly state, so Illinois shareholders should look in to their rights. For more on Minority Shareholder Oppression, see our article “What Is Oppression of the Minority Shareholder?”