How To Remove Shareholders from the Company?

Shareholders take on increased risk as they stand to gain little if the company faces bankruptcy. They have the potential for greater rewards through the appreciation of share prices during the company’s success. However, sometimes, a shareholder can hinder the smooth operation of a business, becoming an obstacle to the corporation’s goals or impeding decisions necessary for the entity’s benefit. 

This article will examine the need of removing shareholders from a company and the various methods of removing shareholders from the company.

Removing shareholders from a company

Removing shareholders from a company depends on the business entity’s bylaws and existing shareholders’ agreement. Even without a shareholders’ agreement, involuntary removal remains a possibility but becomes more challenging.

Shareholders are an important part of a company’s growth. They contribute to the company’s performance and share price rise in the long term. So, why would an employer be involved in removing shareholders from a company? Let’s find out.

Situations for removing shareholders from company 

Shareholders may decide to part ways with a company for various reasons, such as 

• Retirement, 
• Health concerns, or
• A desire for new challenges. 

In the case of publicly traded companies, shareholders have the option to sell their shares on the stock exchange. Removing shareholders from a company involves two scenarios.

• Involuntary Removal: There are circumstances where a company may find it necessary to initiate removing shareholders from a company through involuntary means. Legally, this is feasible, depending upon a shareholders’ agreement that binds individuals holding shares to specific conduct measures. 
• Shareholder Agreement Breach: If a shareholder breaches the agreement or violates the bylaws, the company can take prescribed steps for their removal. This process is essential for maintaining the integrity and effective functioning of the company.

Tips for removing shareholders from company

Removing shareholders from a company isn’t as simple as hitting ‘delete’—it involves transferring their shares. Here are some tips for a smooth process:

• Transfer of Shares: When shareholders decide to leave, they can transfer their limited company shares to others through a sale or gift. Be aware of potential Stamp Duty (0.5%) for transactions over $1000 and Capital Gains Tax for profitable sales.
• Buying Out Minority Shares: In disputes with a dissenting shareholder, buying out their shares is an option. While majority shareholders have no automatic right, Articles of Association might allow it. If not, a special resolution (75% votes) can amend the articles, but beware of potential claims for unfair prejudice.
• Negotiate or Use Shareholders’ Agreement: Check for a ‘buy-back’ clause in the shareholders’ agreement, especially in challenging situations.
• Voluntary Liquidation: A drastic option is a members’ voluntary liquidation by majority shareholders (at least 75% ownership). Assets transfer to a new company, and the removed shareholder gets no shares. 
• Death of a Shareholder: In case of a shareholder’s death, follow the company’s guidelines for transferring shares. A Stock Transfer Form, completed by a director, formalizes the process.

Legal Grounds for Removing Shareholder

It is very important to understand the legal reason for removing shareholders from a company against their will. One important reason is failures of fiduciary duty, which happen when clients break the trust and responsibility put in them. Corporate bylaws set involuntary removal provisions, and legal processes enforce them.

For example, if a shareholder receives private business information and then shares it with others for personal gain, it could be a breach of fiduciary responsibility and a legal reason to fire them. After that, the right way to remove someone depends on corporate rules and legal processes.

Voting and board decisions are often useful in removing shareholders from a company. These steps make it possible to take a firm stance when problems arise that require removing a member against their will.It is necessary to remove shareholders by a board resolution or a simple majority vote to restore order to the business.

Drag-along rights are a mechanism designed to streamline the process of selling a company or its assets. The primary purpose is to provide a unified approach when a major decision like a sale is on the table. Companies strategically structure and implement drag-along rights in shareholder agreements. It involves clear clauses specifying the conditions triggering these rights and the procedures.

Offering Alternatives to Shareholder Removal

When considering removing shareholders from a company, it’s important to approach the situation with fair transparency and under legal and regulatory requirements. 

Here are steps you can take to offer alternatives to shareholder 

• Ensure that the valuation of the shareholder’s stake is fair and reasonable. Consider engaging external experts for an unbiased assessment.
• Design exit packages that consider the individual circumstances of the shareholder. Tailor the package based on their contributions, tenure, and role within the company.
• Explore non-monetary incentives, such as allowing the shareholder to retain certain benefits, use of company facilities, or access to resources for a specified period after the exit.
• Consider incorporating non-compete and non-solicitation clauses to protect the company’s interests post-exit. However, ensure these agreements are reasonable and legally enforceable.
• Offer post-exit support, such as career counseling or assistance in finding new opportunities, to demonstrate a commitment to the shareholder’s well-being beyond their tenure with the company.

Issue and manage your company shares on Eqvista

To properly remove a shareholder from your business, you need to know the unique corporate laws in your state. It is very important to get help from a lawyer to understand these complicated laws and ensure you follow them. You can confidently cut out a shareholder if your attorney properly reviews your state’s corporation laws.

Through Eqvista, you can efficiently manage your company’s equity structure, track ownership percentages, and ensure accurate record-keeping. Additionally, the platform allows you to collaborate seamlessly with legal professionals by providing easy access to historical data, which can be crucial in resolving shareholder disputes or removing shareholders from a company. Take control of your company shares and governance. Sign up with Eqvista now to handle shareholder complexities with confidence!