Can a majority shareholder force a buy out of a minority shareholder?

For any business shareholders hold the key. But shareholder needs security especially the minor one. On a legal note law provide certain parameters which enable the shareholder to safeguard his interest. Quite understandably so because you never know if a majority shareholder will be buying the stocks and trying to conduct hostile takeover, which increases the possibility that your Profit dividends might take a dent. In situation like these, shareholder agreement compels majority shareholders and directors to sought approval of the rest of shareholders. Simply we can say that decision making because of this agreement will not rest with directors, rather shareholders hold the key. In Scotland Shareholder agreements are suitable for every kind of companies irrespective of business type. It serves as mean to safeguard shareholder rights without disrupting business itself. Moreover shareholder agreements can be devised for existing and new businesses alike. But still why a shareholder would go for such legal covering There can be numerous reasons first of all and quite obvious one as well, is the directors and members confrontation. Though directors are appointed by members vote but point of dissent arise when directors compensation needs to be decided. On top of that if the member is also a shareholder then obviously possibilities are there that a director will get a better cut with respect to other shareholders. So in this case a water tight shareholders agreement needs to be formulated and signed, this way bearing the directors from exercising exercise rights. Also in case of ownership of the shares, be it change of hands or death of existing shareholder, this shareholder agreement provides working mechanism for new owners providing legal cover to the existing owners. However, provisions that prevent the transfer to certain specific classes of people may be contentious. How Scottish companys act 2006 helps minority shareholders? The Scottish Government progresses the implementation the Companies Act 2006, which is a revised form of Companies Act 1985 as it changed in order to bring about changes in shareholder agreement. As per section 160 till 169, procedure for nomination and selection/removal of directors are mentioned in the act. All the decisions as per law will carried out by the shareholders in this case. Furthermore key changes to the act are as under Enhance shareholder engagement and a long term investment culture. A clear statement of directors' general duties clarifies the existing case law based rules . Companies will be able to make greater use of electronic communications for communications with shareholders. Directors must be at least 16 years old, and all companies must have one natural person as a director, i.e. they cannot have all corporate directors.

There will be greater rights for nominee shareholders. These will include the right to receive information electronically or in hard copy if they so wish. There will be more timely accountability to shareholders by requiring public companies to hold their AGM within 6 months of the financial year-end.

What contents need to be included in shareholders agreement? A shareholders agreement may cover such matters as: Matters which require shareholder consent or special majorities; Shareholders information rights; Right to nominate directors.

And what should be the key components of document? As mentioned earlier this agreement is used for all kinds of businesses so its core ingredients defines the business and the line of actions for all the possibilities related to management, exit scenarios and induction of new possibilities. Following are the main components Definitions. Relationship of parties Directors. Proxy votes. Companys obligations. Actions for which shareholders consent is required. New intellectual property. Confidentiality. Exit strategy. Transfer of shares and right of pre-emption. Procedure after transfer. Transfer of shares on death or incapacity. Shareholders continuing obligations. Restrictions on shareholder after transfer. Conflict with the articles.

Breach of this agreement. Agreement is divisible. Notices and service. Dispute resolution. Waiver. Jurisdiction. The Schedule, draft letter to accountants.

But all that needs to be formalized beforehand. Line of business needs to be clarified so as to avoid any inconvenience at your end no matter if you own the company or are just a small part of it. Key is that you must be safe legally.
About the Author:

Haider is an independent writer who is interested in the convergence of technology and law. He writes about the legal issues that face individuals and small and medium sized businesses, emphasising how the Internet has changed practice of the law and the delivery of legal services.