Compulsory transfer under the constitution of an LTD

Sometimes the constitution of an LTD will provide that a member is obliged to transfer his shares upon the occurrence of certain events. One of the earlier cases which upheld the validity and enforceability of such a clause was Borland’s Trustee v Steel Brothers & Co Ltd. 239 Extreme caution should be exercised by the members in altering the constitution to provide for the compulsory transfer of a member’s shares, lest the alteration be set aside as being mala fide and not in the interests of the company as a whole. 240 Even where the constitution provides ab initio for the compulsory transfer of a member’s shares, the courts will construe such provisions strictly. Where a member’s shares are expropriated in an oppressive manner, he may petition the court under s 212 of the Act. 241

Although there is no compulsory transfer of shares clause in the Act’s optional provisions, a company’s constitution could provide that the following acts are triggers for requiring the compulsory transfer of shares:

• death;
• bankruptcy;
• conviction of an indictable offence;
• insanity or other mental incapacity;
• the commencement of a winding up or the appointment of a receiver or an examiner, where the member is a body corporate;
• the change in the control of a member which is a body corporate;
• the member’s ceasing to be a director or an employee of the company;
• the disposal or attempted disposal of the equitable or beneficial ownership in shares in the company.

It is possible to include a compulsory transfer clause in a pre-emption clause. 242 Where this is done, the occurrence of one of the foregoing events can be deemed to constitute the service of a transfer notice in respect of that member’s shares. Upon the service of that transfer notice, the usual pre-emption rights mechanism will then come into operation.

When shares are compulsorily transferred it is prudent to provide that they are valued in a just and equitable manner as otherwise it is likely that the clause will be found to amount to oppression or simply an unlawful expropriation of private property. Where the auditors are entrusted with the valuation of shares sold pursuant to the pre-emption rights clause, it is often appropriate to apply the same valuation provisions to compulsory transfers. In Re Castleburn Ltd 243 the company concerned was a quasi-partnership private company. In addition to having pre-emption rights, there was a compulsory transfer provision. This provided that any member who was a director or employee and who ceased to be such could be compelled by a majority of the other members to sell his shares. When one of the original promoters who was a director and the owner of 44% of the shares was removed as an employee and a director, the compulsory transfer provisions were triggered. The valuation by the company’s auditors, which discounted their value on the basis that they were a minority shareholding, was upheld as being reasonable by the court. The valuation of shares in private companies is considered in more detail below. 244