Shareholders don’t always work out. Whatever the reason, there sometimes comes a point where one shareholder wants to cut ties with another in their company. While it’s a complicated process, it’s not impossible – especially if you take precautions.
How to remove a shareholder
Here are five steps you should consider taking when making moves to remove a shareholder.
1. Refer to the shareholders’ agreement.
A shareholders’ agreement outlines the rights and obligations of each shareholder in an organization. Typically, all shareholders create and agree on it to ensure everyone is fairly represented. That way, if you want to cut ties with a shareholder down the line, you can refer to this document for guidance.
“The shareholders’ agreement is a contract between all the shareholders that they will not do certain things,” Nate Masterson, chief marketing officer for Maple Holistics, told us. “If the conduct rules are specific enough, getting rid of a shareholder for misconduct becomes much simpler.”
This is especially useful when removing a majority shareholder – someone who owns more than 50 percent of the company’s outstanding shares. If they violate anything explicitly stated in the agreement, you can remove them solely based on that offense. To avoid this issue, you can also make a provision in the agreement to elect a director annually, said Masterson.
Make sure to be specific with the agreement. It is vital that you review details that can influence how and when to remove a shareholder, as well as any consequences for doing so. Look for details like the dates, the number of issued shares, anything related to shareholder equity, and the rights of shareholders in the event of a company sale, among other clauses that may impact the shareholder removal process.
Tip
When writing a shareholders’ agreement, include a buyout clause that allows directors to purchase a minority share for an agreed-upon price. This will prevent minority shareholders who cannot be voted out from refusing to surrender their shares.
2. Consult professionals.
Before acting, especially without a shareholders’ agreement in place, you need to reach out for professional insight to avoid any legal issues. While you might think the process is simple, it requires much thought and attention.
“In short, removing a shareholder is not something for amateurs,” said Stanley P. Jaskiewicz, an attorney at Spector Gadon Rosen Vinci P.C. “You should consult with counsel, under attorney-client privilege, as early as possible. An agreed-upon voluntary buyout between the company and the targeted will almost certainly cost far less than the expense of a contested removal.”
Professionals can help you approach the matter in an objective, negotiable manner, while ensuring you meet any regional requirements in your area. This is crucial in any business decision, particularly ones that might cause tension among business partners. You don’t want to skip this step in the interest of time or money.
“In some cases, the expense of an independent attorney may even be necessary if the company’s counsel has ethical or legal obligations to the target of the removal,” said Jaskiewicz.
Bottom Line
Don’t go it alone. Consult your attorney and other relevant professionals before taking any action.
3. Claim majority.
Without an agreement or a violation of it, you’ll need at least a 75 percent majority to remove a shareholder, and said shareholder must have less than a 25 percent majority. The removal is accomplished through votes, and the shareholder is then compensated upon elimination, according to Masterson.
While claiming the majority might work in some cases, it won’t work against majority shareholders who have already acquired more than 50 percent majority alone, or even majority shareholders with more than 25 percent majority.
4. Negotiate.
If all else fails and you find yourself with no legal reason to remove the individual, you should sit down and negotiate with them, discussing a fair value for their shares.
“Although the shareholder may not be able to keep his shares, he almost certainly can dispute the value of what will be paid for the shares and whether his removal occurred for an improper purpose,” said Jaskiewicz.
Once you reach an agreement, you can buy back and distribute their shares to individuals in the company.
“If during negotiations you succeed in ousting a shareholder, you must ensure that no shares remain unallocated,” said Anthi Pesmazoglou, legal consultant at Gerrish Legal. “All shares will have to be either gifted or transferred to another shareholder by using a stock transfer form.”
FYI
If a shareholder absolutely refuses to negotiate and you have no agreement in place to force the removal, you might have to face a tough decision: parting ways with the company or learning to work with the individual regardless of your concerns.
5. Create a noncompete agreement.
If you’re successful in removing your shareholder, proceed with caution. Because the process is often rocky, you want to impose a noncompete agreement on your departing shareholder. This will ensure they do not start or enter a business that directly competes with your organization for a set number of days after leaving.
FAQ about removing a shareholder
A shareholder is a person, board member or entity that owns at least one share of company stock. Holding those shares entitles you to certain profits from the business. Those come in the form of dividends. When a company releases dividends, shareholders receive a portion of those. How much depends on how many shares you own.
Depending on the shareholders’ agreement, some shareholders may also be allowed to help make some companywide decisions on things like board member appointments and merger opportunities.
When it comes to shareholders, there is usually a big difference between privately and publicly owned companies. With privately owned companies, there are typically fewer shareholders, which may mean they have more say in the direction of the company. With publicly owned companies, there are significantly more shareholders (think how many people own a share of Apple stock), which ultimately means the rights aren’t as meaningful.
Although it may be somewhat difficult, removing a majority shareholder is possible – for instance, if they have violated the original terms of the shareholders’ agreement or the company’s bylaws.
Most shareholders are bestowed the following rights:
The right to vote on major issues
Ownership of a portion of the company
The right to transfer ownership
Entitlement to dividends
The opportunity to inspect books and records
The right to sue for wrongful acts
When a shareholder leaves a company, the remaining members of the company must determine the value of the interest of the shareholder leaving. If there is no plan in place, the company must negotiate in order to buy out the leaving member of the company.
Source interviews were conducted for a previous version of this article.
Stella Morrison is an award-winning writer who focuses on marketing for small businesses, including useful tools and best practices that help business owners introduce their products and services to new audiences. She is also a digital marketing professional who has worked with leading brands in the tech industry.
