If a relationship with a shareholder fails to work out, the removal of that shareholder from your business or corporation is possible. Complications may arise when undertaking the removal of a shareholder.
“Removing a shareholder from a corporation is often contentious. Even when a shareholder agreement can be removed, doing so can give rise to lawsuits.”Business & Litigation Attorney Michael Long
Consult with an experienced business law attorney to determine whether the shareholder can be removed.
Review Shareholder Agreement
The most critical first step in planning for the removal of a shareholder is a review of your shareholder agreement. Your shareholder agreement may provide the proper procedure for the removal of a shareholder.
A shareholder agreement operates as a type of contract, providing guidelines for proper shareholder conduct. If a shareholder fails to adhere to conduct guidelines within a shareholder agreement, the removal of the shareholder for misconduct is easier.
It can be more difficult to remove a majority shareholder absent a shareholder agreement. Since a majority shareholder holds more than 50% of the voting rights of a company, whether a majority shareholder can be removed becomes substantially more difficult, if not impossible. Therefore, when attempting to remove a majority shareholder, provisions within a shareholder agreement may help. If a majority shareholder violates any rules of conduct within the shareholder agreement, basing the majority shareholder’s removal on that violation simplifies the removal process.
However, the involuntary removal of a shareholder opens up the possibility for future legal disputes.
Shareholder agreements also provide information about the number of issued shares, restrictions on transferring shares, rights of current shareholders to purchase shares, and details regarding the sale of shares.
Some shareholder agreements do not provide for proper removal procedures. If no shareholder agreement exists or there has been no violation of an existing shareholder agreement, consult with a business lawyer to determine removal options for your company.
If a shareholder is also an employee, you may wonder whether you can fire a minority shareholder. While it is possible to terminate a shareholder’s employment, carefully review your employment contract. Consult with an attorney to anticipate any potential legal issues with termination of employment.
Other Ways to Get Rid of a Troublesome Shareholder
Available removal avenues may fail for various reasons. Perhaps you don’t have a shareholder agreement or can’t show that it was violated. Or maybe you have been unable to get sufficient support to vote out the shareholder. If you are unable to directly remove a shareholder, there are other options to encourage them to leave the company.
One option to consider is negotiating with the minority shareholder to sell their shares. While you can technically force a shareholder out, negotiation prevents the opportunity for legal issues down the road. It is always possible to negotiate with the shareholder regarding the purchase of the minority shareholder’s stake. While it is common to discount sales of minority shares, presenting a reasonable offer may encourage the shareholder to accept.
It’s important not to engage in any activity constituting minority shareholder oppression. Minority shareholder oppression examples include the following:
- Withholding information from the shareholder;
- Withholding profits or dividends;
- Violating minority shareholder rights; and
- Going against specific provisions in the shareholder agreement.
Pursuing any of these courses of action could result in legal action by the shareholder for this conduct.
Permissible conduct which may encourage a minority shareholder to sell their shares includes:
- Termination of shareholder employment. If undertaking this avenue, carefully review termination procedures in your employment agreement.
- Reduction of shareholder authority. Voting to reduce the minority shareholder’s decision-making power may encourage the shareholder to sell their shares.
While this conduct is generally permissible, consult with a business attorney to prevent any opportunity for future legal disputes down the road.
Even if the shareholder fails to violate terms of the shareholder agreement, removal may still be possible. For example, your shareholder agreement may provide for a buyout clause. A buyout clause allows for purchase of a minority share for an agreed-upon price. A buyout clause prevents minority shareholders who cannot be voted out from refusing to surrender their shares.
When determining whether a majority or minority shareholder can be removed, consult with the qualified business attorneys at BrewerLong to guide you in the right direction. Despite the removal of a shareholder, ensure your company continues operations smoothly and without interruption. BrewerLong attorneys work to limit any opportunities for future legal disputes with removed shareholders. With over a decade of experience, the attorneys at BrewerLong work to create excellent experiences through helping, listening, and collaborating with all clients. Contact us today to discuss whether a shareholder can be removed from your company.
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