How does a company control its shareholder composition?

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One common reason for a company to control its shareholder base is to prevent a shareholder who is no longer actively involved in the day-to-day operation of the company from exerting influence over the company.

A company may achieve this control through compulsory transfer provisions.

These provisions typically require officers or employees who hold shares in the company to transfer or forfeit their shares upon termination of their office or employment. The common mechanisms for forfeiture include the following:

1. Exiting officers or employees may offer the shares to the company to purchase through a share buyback arrangement.

2. Exiting officers or employees may offer to transfer the shares to the remaining shareholders.

3. The shares may be converted to a deferred class of shares.

When preparing a shareholders’ agreement, constitution, or terms and conditions of a share grant scheme, consider whether it is appropriate to include compulsory transfer provisions.

This post first appeared on LinkedIn on 13 July 2023.

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