The first thing to make clear is that there are no circumstances in company law where a shareholder must sell his shares back to the company or to the other shareholders – even if he is squarely in the sin bin.
Imagine you have given a star employee 15 per cent of the shares in your company as an incentive to stay or as a reward for good work. What happens if he later wants to leave the company or, even, is sacked? What happens to the shares? Can he keep them?
The answer is yes – he can, unless he has signed a legal agreement promising to hand back those shares when he leaves the company.
A Shareholder Agreement can cover this, saying what will happen to the shares after a shareholder leaves the company.
However, Shareholder Agreements can also set out a wider list of events which might trigger a compulsory sale. For example:
- the death or critical illness of a shareholder
- the bankruptcy of a shareholder
- a shareholder is absent for an extended period or abandons the company
- a shareholder commits an act which is akin to gross misconduct under an employment contract
The Shareholder Agreement can also set out what price should be paid for the shares if any of these events happen. Many companies decide that the price should be less than full market value if the transfer of shares is triggered by one of these ‘compulsory’ and unwelcome events.