Meaning
A legal obligation forces a shareholder to sell their equity to another shareholder or to the company under specific triggering conditions. A compulsory share purchase protects the joint venture from the continued involvement of a defaulting or departing partner. This remedy is typically triggered by material breaches or insolvency.
It does not apply to voluntary share transfers that follow the standard right of first refusal process.
Valuation Standard
The price paid for the shares is determined according to a pre-agreed formula in the shareholder agreement. This formula often distinguishes between a good leaver, who receives fair market value, and a bad leaver, who receives a discounted price.
Triggering Event
Statutory obligations arise automatically upon the occurrence of a specified event, such as a change of control in a corporate shareholder. This safeguard prevents a competitor from gaining indirect access to the joint venture’s proprietary technology or market strategy. By forcing the transfer of shares, the remaining partners maintain control over the shareholder composition.
This ensures alignment of strategic interests.
Procedural Enforcement
If the departing shareholder refuses to execute the transfer documents, the company’s board is typically authorized to sign on their behalf. This power of attorney is embedded in the corporate articles of association to prevent deadlock and ensure smooth transitions. The purchase consideration is held in escrow until the transfer is completed.
