Forcing a third party buyout of a minority shareholder14 January, 2015
Many articles of association and shareholders agreements contain “drag along” provisions which enable a majority of the shareholders to require that a minority agree to sell their shares in the event of a proposed buyout by a third party. The reason for this is that most buyers of companies do not want to buy less than 100% of the shareholding. What if there are no such provisions and a minority shareholder is refusing to sell?
The answer to this may be to amend the articles to add drag along rights to facilitate the sale. This will normally be possible if the majority shareholders can muster a 75% majority vote.
In such circumstances the minority shareholder may claim that this is unfairly prejudicial to them and gives rise to a claim under s.994 of the Companies Act 2006. It will certainly be “prejudicial” if the minority shareholder is being forced to sell his shares against his will but the more important question will be – will it be “unfair”?
In this respect the cases suggest that where there is bona fide sale to a third party at a fair value and the minority shareholder is not being treated differently to the other shareholders then the addition of drag along rights to ensure that 100% of the company can be sold will not be “unfairly prejudicial”. On this basis a minority shareholder will not be able to block the change to the articles by using s.994.
In summary, if you are a minority shareholder who wants to hang on to their shares then the courts are unlikely to step in and prevent “drag along” rights being added to the articles unless there is unfairness which extends beyond the simple fact of being forced to sell your shares. If you are being treated the same as all other shareholders and the underlying sale is a genuine one then the majority shareholders will be allowed to amend the articles (if they have the power) to enable them to force the sale through.