In the Shareholders' agreement or Articles of association, a company may place an obligation on the shareholders to force a sale of their shares if a specific event is triggered. Some of these 'trigger events' can include:
- death of the shareholder
- bankruptcy or insolvency of the shareholder or company
- change of control of the company
- cessation of employment (especially if the shareholder is a director or employee of the company)
- mental or physical incapacity of the shareholder
The reason for having compulsory transfer provision (also known as a ‘leaver provision’) is to protect the interests of the company, for example, in the absence of any agreement or provision providing otherwise, any shares held by a deceased shareholder will pass under the terms of their Will (if they had one) or under the rules of intestacy. This could mean that a surviving spouse or children of the deceased could hold a significant shareholding in the company.
If an employee or director (who is also a shareholder) is leaving the company, then it makes sense for the company to obligate the shareholder to sell their shares as well. Most employee shareholding schemes are an incentive for employees with valuable skills to remain with the company until a specified time.