How to remove a shareholder of a company
Most directors and shareholders are the same persons in SMEs, known as ‘quasi partnerships’. So what happens to the shares if a director leaves or ceases to play their part in running the business? Can you force a sale of the director’s shares? Here’s a discussion on how to remove a shareholder of a company.
The majority shareholders can remove a director by passing an ordinary resolution (51% majority) after giving special notice. That much is fairly straightforward. But take care, since if the director is also an employee you will need to terminate their employment. A director who has been dismissed may have a claim for unfair dismissal. The director will continue to own the shares and will continue to be entitled to their share of dividends.
Can you force a sale of the shares?
There is no automatic right for the majority shareholders to force a sale by a minority shareholder. Conversely, there is no automatic right for a minority shareholder to force the majority to buy their shareholding.
So what are the ways of removing a minority shareholder of a company?
There are several possible ways to remove a shareholder of a company or force a sale of their shares, but care needs to be taken in each case, and a tactical approach is required.
- Check the articles of association of the company to see if they contain drag-along provisions which would enable the majority of the shareholders to force the minority to sell in the event of a buyout of the company.
- Consider passing a special resolution (75% majority) to alter the articles to include provisions to force a sale of the shares, say for fair value. However, any alteration should not amount to an oppression of the minority and should not be unjust.
- Check if there is a shareholders’ agreement which contains a ‘buy-back’ clause which can be invoked if a shareholder leaves the company. This is sometimes known as a ‘bad leaver’ provision.
- Consider increasing the remuneration of the remaining directors, and reducing sums paid by way of share dividends. This may not be tax efficient, but may be preferable to paying dividends to a shareholder who no longer participates in the running of the company. But take care, since you should be able to justify this course of action.
- Once you have assessed your options, you should start negotiations with a view to reaching agreement for the purchase of the shares for fair value. You should first discuss with your accountant carrying out a valuation of the shares. A minority shareholding will often be valued at a figure below what the shares would be worth based on a percentage of the whole. Check to see if the Articles contain a formula for valuing a minority shareholding.
- Care should be taken to avoid a dispute which could end in costly litigation. A minority shareholder has the right to apply to the court claiming ‘unfair prejudice’. The court will usually order a sale of the leaving shareholder’s shares at a determined value. Company litigation is expensive and the costs would usually be paid for by the individual shareholders. However, the threat of such proceedings can be used to put pressure on the minority shareholder to reach agreement for the sale of their shareholding.
- The company could consider bringing a claim against the departing director if it can show it has suffered some loss as a result of a breach of his duties as a director. Care should be taken, however, to check that the other directors have not themselves been in breach of their duties.
- If the majority hold 75% of the shares, then you could consider the nuclear option of winding up the company. If a solvent company is wound up through a members voluntary liquidation (MVL), the company’s assets can be transferred into the name of Newco, which would not issue shares to the minority shareholder in Oldco.
Conclusion – Removing a shareholder of a company
Each case needs to be carefully considered on its merits. Most shareholders disputes are resolved by having the majority buy out the minority shares for fair value. A well drafted solicitor’s letter making an offer to purchase the shares on terms which would most likely be awarded by a court (adopting the principles in the leading case of O’Neill v Phillips) will put pressure on the minority shareholder to negotiate sensibly, otherwise they risk incurring substantial legal costs if they fail to do so.
To avoid these situations arising in the first place, companies should put in place suitably drafted articles of association and a shareholders’ agreement.
If you would like to discuss any issues which affect your company, please contact Gil Percival at gap@anthonygold.co.uk or call 020 7940 4000 or any member of our Commercial Department.
* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*
Hi,
Hope you can help?
I own 49% of the UK Subsidiary of an international consulting IT Firm.
What is the best way to get rid of my shares? Can I sell the shares to any other party?
Thanks
Thank you for taking time to leave a comment. A member of our team will contact you regarding your question.
Hi, I am the managing director of a limited company with 1 million pound + turnover.
Over 3 years ago I gifted a 20% share to the other company director as an incentive to work hard as I wished to spend more time away from work.
The arrangement hasn’t worked, sales & profits have fallen so I have decided to sell my company & retire.
The question is this, how can I best remove the minority shareholder prior to sale. As the 20% shareholder has never put a penny into the business, or brought any business or customers onboard, I feel aggrieved that I would have to give away a fifth of my retirement fund due to a bad decision made 3 years ago. What are my options please & what is the best way to handle this?
Also, there is no shareholder agreement in place.
Many thanks, Andrew Martin
Thank you for your comment. A member of the team will get in touch with you soon.
Hi there
I am assisinting my partner is solving a Director and shareholders dispute with his ex wife.
I’ve sought some legal advice already but unfortunately the lawyer seems too busy to support us and am seeking alternate legal advice.
Thanks
Becky
Hi Rebecca, thanks for your comment. A member of the team will get in touch with you shortly to see if we are able to help. Kind Regards
I am interested to know the outcome of this
Hi ,
I have taken a step back from my company and steeped down as director i own 30% along with my business partner which owns 12.5% the new company director owns 47.5 % and has now tried to make more shares and sent a email asking me to buy more shares or i face losing my share % and in turn the stake in the company we have a solid partnership agreement which says no new shares can be made unless 76% agree to doing this and that my self and him agree to this which i don’t he has now said our original agreement is not binding and has given me 14 days to buy back may share % or face losing them as he wishes to bring new investors in this has all happened in a space of 16 weeks from stepping down can you give any advise at this stage and where i stand in legal terms.
Thank you for taking the time to comment, a member of the team will be in contact with you shortly via email.
Thanks for sharing this precious information with us, This really helpful for me,
To some who asked questions above – if you have (or control) 75% or more of the shares I believe you can change the share structure so dividends would be payable at rate x to shareholders with A shares & at rate Y to B shares – so you can be paid in dividends & not pay the same amount per share to shareholders who are not directors. Then you are paying dividends to them based on profit instead.
And if you own or control 51% or more you can vote someone off the board of directors first. I did it (with good reason). The only way to really do this though is through a good solicitor. I tried for years to understand this & it wasnt until I got specialist legal advice did I find out what I could do. Wasted years through not knowing.
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