Communicate the minimum acceptable standards for participation in the class. Make sure the students understand what those requirements are and how they are expected to meet them.
Hold all of the students to these standards. Consistency is key to effectively establishing requirements.
Engage "lazy" students in classroom discussions. Ask them questions about the day's reading assignment. A student who knows he will be called on is more likely to do the work. If the student is obviously unprepared, stop questioning him, as it will only serve to embarrass him and undermine whatever willingness he does have.
Pause to give the students time to answer your questions during class discussion. Silence, while sometimes uncomfortable for the teacher, can be even more uncomfortable for students, and will often prompt a response when nothing else will.
Praise the student for his answer, even if it is off the mark, and try to find a way to bring it around to the subject at hand. This will build students' confidence and encourage them to speak up, participate and prepare.
Provide feedback on assignments and in-class discussions. Praising students for what they have done right often makes them want to do even better. One general approach is to give four compliments for each criticism.
Disguise a criticism as a compliment. For example, praise a unique and interesting take on a particular observation, and give the student additional information based on his perspective. This gives encourages a student and demonstrates how to take the idea a step further.
Document unacceptable behavior and meet with student to discuss the behavior. You can hold the meeting with a colleague present to corroborate the events, but never meet in front of other students.
Discipline the student appropriately. If there are disciplinary actions spelled out by the institution or department, follow them. In severe cases, remove the student from the class. It may be better to remove a problem student who is unwilling to try than to diminish the course for the remaining students.