“What are tender offers, and can I make money with them?” asks your dentist as she adjusts the chair to the upright position. You briefly answer her questions, and she says, “can shareholders be forced to sell shares?” You pull out your phone, “I don’t know but let’s check Event Driven Daily, I’m sure they have the answer”.
Can Shareholders be Forced to Sell Shares?
No, shareholders cannot usually be forced to sell shares against their will, but there are exceptions. Company shares are a fractional ownership interest in a firm, which normally cannot be taken away by the company. However, there are a few circumstances when shareholders must sell their shares though they would prefer to hold on to them.
Can shareholders be forced to sell their shares? This is a question best answered by examining specific situations when a shareholder’s ownership stake is involuntarily sold.
Articles of Incorporation Buyout Provisions – Some firms have Articles of Incorporation or Bylaw provisions that may mandate the forced sale of shares under certain conditions. If the shareholder majority approves the sale of the company, the minority shareholders can be required to sell their shares. This bylaw provision is called drag-along rights and is designed to protect majority shareholders by ensuring minority stakeholders’ involuntary obligation to the sale of the firm.
Shareholder Agreements – Shareholders can enter into agreements that mandate the sale of their shares to either other shareholders or back the company. Shareholder Agreements are relatively rare in publicly traded companies but are common in privately held firms. In smaller companies, minority shareholders can easily shift the balance of power and dictate policy by selling or transferring their stake to a third party. As a counterbalance, the company may insert a first right of refusal clause on any shares designated to change hands.
Can shareholders be forced to sell their shares? We have uncovered two situations in which shareholders are forced to sell, but there’s more …
Takeover Transactions – A friendly acquisition or a hostile takeover usually results in the acquirer gaining 100% ownership of the target company. Articles of Incorporation allow this transfer of ownership despite any objections from minority shareholders providing majority shareholders approve the sale. This process is called a minority squeeze-out.
Some corporations allow a simple 51% majority shareholder vote to compel minority stakeholders to capitulate, while other firms require a 90% supermajority vote for minority share surrender and sale consummation.
Court Order – The court can mandate the sale of shares in rare cases. Deadlock legal disputes or significant shareholder conflicts can result in forced share liquidation.
Can shareholders be forced to sell their shares? Under specific conditions, shareholders may face involuntary share sales. These situations are governed by the jurisdiction in which the company is domiciled, the terms and conditions of the firm’s Articles of Incorporation, and shareholder agreement provisions. Understanding the company’s stock rights and obligations is predicated on shareholder familiarity with the corporate bylaws, stakeholder agreements, and any relevant laws.
