Can a Minority Shareholder Force Out a Majority Shareholder?
In private companies, shareholders sometimes attempt to force each other out. This typically occurs when shareholders disagree about the direction or operation of the business, but it could also occur for a number of other reasons. The legality of actions undertaken during a force-out is hard to determine in some cases; however, shareholders can legally protect themselves in advance if they take the proper steps.
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Legality
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Barring certain special circumstances, there is no legal way for one shareholder to literally force out another shareholder at will. Rather, a shareholder will typically employ coercive tactics in order to pressure the other shareholder to sell his shares. Depending on the actions taken, the shareholder that is the target of the force-out may be able to obtain legal defense against this kind of pressure.
Probability
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In practice, the likelihood of a minority shareholder forcing out a majority shareholder is extremely low. Since the majority shareholder has control of the company, there is virtually no way for a minority shareholder to pressure him. If a minority shareholder did try to force the majority shareholder to sell against his will, the majority shareholder would almost certainly be able to mount a more effective force-out campaign against the minority shareholder.
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Prevention
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All shareholders can protect themselves against force-outs by drafting a shareholder agreement. The shareholder agreement is a legal document detailing shareholder rights and specifying the conditions under which one shareholder can buy out another. One common buyout clause allows one shareholder to set a share price and offer to buy out the other shareholder at that price. The other shareholder may either agree to this or buy out the shareholder who initiated the offer at the specified share price. This ensures a fair price for shares in the event of a buyout.
Conclusion
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The best way to prevent a force out situation is to draft a shareholder agreement in advance. When drafting the agreement, shareholders should anticipate all possible situations in which one may want to buy out the other and decide how these situations will be resolved. In almost all cases of a force-out, it is the majority shareholder trying to force out the minority shareholder, so the minority shareholder is the one most in need of legal protection. Some shareholder agreements may require both shareholders to agree to a buyout, while others may include clauses allowing a buyout to take place under specified conditions.
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