We are publishing a series of articles on the Bribery Act 2010 and what it will mean for every business on our related blog by Derek Rodgers – read them here.

They operate where the pre-emption rights include mandatory transfer provisions which force a shareholder to offer his shares to the other shareholders in certain situations such as death, leaving the company’s employment, bankruptcy or breach of a shareholders agreement.  Usually if the situation does not arise from any ‘fault’ on the part of the outgoing shareholder such as death or where employment ends by retirement or due to ill health, he will be classified as a ‘Good Leaver’.  In other circumstances, such as dismissal for gross misconduct or bankruptcy, he will be classified as a ‘Bad Leaver’.  The provisions will usually then specify that the price which a Bad Leaver can demand for his shares is significantly less than that which a Good Leaver will be able to demand – Good Leavers will normally get market value, Bad Leavers often just a nominal amount.  As with any provisions in articles of association or shareholders agreements, these provisions must be carefully drafted.

Small shareholdings in private companies give little power and are unlikely to be saleable on their own.  The best chance of realising their value is by participating in a sale of the whole company.  If the majority shareholders can sell a controlling interest without involving the minor shareholders, those minor shareholders could be left with a worthless shareholding. Tag along rights work by prohibiting a sale of a controlling interest unless the purchaser is willing to buy all the share in the company on the same terms.

See also ‘Drag Along‘.

As a third party purchaser is unlikely to want to buy anything less than 100% of  private company, the wishes of the majority to sell their shares could be thwarted if one or two minor shareholders refused to accept. Drag along rights usually work on the basis that if a specified majority of the shareholders want to accept, and the purchaser is offering the same terms to all shareholders, dissenting shareholders can be forced to accept as well.

See also ‘Tag Along rights‘.

The financing of any purchase is closely controlled – the company may finance the purchase out of distributable reserves or the proceeds of an issue of new shares or (in the case of a private company) out of capital.  If financed out of capital, there are additional requirements to advertise the proposed purchase and a specific timetable which must be followed.  The proposed contract for the purchase of shares must be approved in advance by means of a special resolution.  The shares must be paid for in full when they are bought back – deferred payment is not permitted.

This is a very brief summary of very detailed rules.  Specific advice should always be sought prior to a share buyback.

For companies incorporated on or after 1 October 2009, the default articles of association will be the Model Articles.  For older companies, the default articles were a version of Table A.  Many companies either replace these entirely or modify them in order to ensure that their articles suit their needs.  For example, it is common to add pre-emption provisions to set out what happens when a shareholder wants to transfer shares so that the other existing shareholders have first option to buy them.   The articles may also be modified to give different rights to different classes of shares.