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Gunning For Shareholder Control

Arsenal fans have plenty to discuss before the start of the new football season with news of a proposed takeover that will significantly change the ownership of the club.
The takeover offer will result in the main shareholder owning 97% of club’s shares and this, in turn, raises a number of questions as to the rights of its minority shareholders as well as the methods available requiring a minority shareholder to sell up.
It can be problematic for companies, should a minority shareholder not wish to sell their shares. Prospective takeover bids often insist on acquiring 100% of the company shares – so there is a clean slate for the purchaser and the promise of absolute control. Situations can arise where the relationship between company shareholders breaks down and disgruntled minorities can put the sale at risk by refusing to participate and be a team player. Regardless of reason or motivation, they can be the proverbial “spanner in the works”.
To prevent minority shareholders from exercising this disproportionate level of control, the law grants a right under the Companies Act 2006 by allowing prospective purchasers to squeeze out non-compliant minority shareholders and force them to sell their shares. In order for this to be achieved, the takeover bidder must acquire or be unconditionally contracted to acquire not less than 90% of the value of the shares to which the takeover offer relates and voting rights carried by the shares to which the offer relates.
A useful substitution in the absence of this right can exist in the form of ‘drag along’ rights. Drag along rights enable majority shareholders to compel the minority to sell its shares in the event of a proposed company takeover. These are however bespoke provisions and if they are not currently incorporated in the company’s articles of association, the majority shareholders will need to authorise an amendment to incorporate and bring these into play. Amending the company articles requires 75% shareholder approval and in any event should be co-ordinated with the assistance of a legal expert. Shareholders would be wise not to score an own goal however by forgetting to draft a bespoke shareholder’s agreement where drag along rights can also be inserted.
If a minority shareholder is unhappy with being forced out of the company, they may have the right to claim unfair prejudice. In determining whether a minority shareholder has been fouled, the court will referee all aspects of the proposed sale and the circumstance leading up to it (e.g. are the shares in question being purchased at a fair market value?).
Regardless of the circumstances at shareholder level, it is vital that carefully drafted articles of association and shareholder agreements are drawn up as these will provide a clear guide relating to the running of a company and promote fair play on and off the field.

These require professional legal advice that our specialist Commercial Team can provide, call us on 0800 088 6004.