Shareholder Removal – What you need to know before acting?

Business, by its very nature, is a realm of complexities and potential misunderstandings among shareholders and partners. But when such situations arise, can a company’s shareholders be removed? Absolutely. The power to remove them is in your hands, available at any time.

Understanding the procedures involved is crucial, as they can be different depending on each company’s governing documents, such as shareholder agreements and articles of association. These documents include the rights and obligations including the process of removal. Legal implications and financial impacts should be considered when removing a shareholder from a company.

Let’s explore the details of shareholder removal.

Removing Shareholder from company

Let’s check some scenarios for removing the company shareholders.

Removal Through Agreement Breach

In this scenario, one of the shareholders fails to meet some of the agreed-upon terms and conditions of the agreement; for instance, they start a competing business or need to deliver on some capital contribution as agreed.

For example, a Tech Startup has a Shareholder agreement that includes a non-compete clause. After considering this, the remaining shareholders decided to enforce the agreement, which led to the removal of the breach.

The removal took place by buying back the shares at Fair Market Value, determined by independent valuation as was mentioned in the Agreement.

Majority Force Buyout

In this scenario, the majority shareholders want to exert pressure on the minority due to a conflict or a strategic move, a decision that carries significant weight and implications.

An example here would be that of a Manufacturing firm, where the majority shareholders disapproved of a business decision that a minority wanted to take for the business.

Thus, the majority of them used a drag-along clause in the Company’s bylaws and forced the minority to sell their shares at a price based on the most recent valuation. This action centralized power and aligned the firm’s strategic plan with the majority’s agenda.

Removal of through Voluntary Liquidation

In this scenario, the company opts to conduct a voluntary liquidation. In this process, all the shareholders are expelled, and their stocks are sold and redeemed for cash or other assets proportionate to their shares.

An example here would be a small retail business that had to shut down, and the management decided to sell all the capital equipment because the company was not performing well due to declining sales.

The company sold its stock-in-trade, furniture, fixtures, land, and buildings and redistributed the realized amounts to the shareholders according to their stake. They also agreed on the liquidation plan, which resulted in the termination of their ownership.

Involuntary Termination Through Court Order (Judicial Dissolution)

In this scenario, they can be removed by an order of the court when they get involved in illegal actions or violate ethical standards, resulting in a loss to the company.

For example, it was discovered that a shareholder in a financial services firm had been embezzling the company’s money. The others took legal proceedings to remove the offense. The court directed the removal of their share(s) and the cancellation or transfer of the share to the firm at a price agreed upon by the court.

Buy-Sell Agreement Activation

A buy-sell agreement comes into force in cases of death, disability, or the shareholder’s withdrawal from the business.

In a family business, when a shareholder wishes to retire, they can initiate a buy-sell contract. This agreement will detail the retirement provisions and the purchase of the shares at an agreed price or through an independent valuer. The company then redeems or repurchases the shares, effectively removing the retiring shareholder.

Steps involved in removing shareholder from a company

To have a structured approach to removing a shareholder from a company, follow the below steps:

Review the Agreement and Company Bylaws

It is essential to review information in the agreement that can be beneficial when removing a majority who owns more than 50% of the stake.

Determine the Grounds for Removal

In case of an involuntary removal, they should have violated the agreement terms or the company by-laws. It is important to determine the reason properly and take appropriate action for the best interest.

Create a Removal Resolution

In case of involuntarily removing, the Board of Directors must create and put forward a resolution for the removal. This requires a 75% majority vote to approve and in such a situation, the concerned shareholder can own up to 25% of the business.

Negotiate and Compensate

If nothing favors removing them as you need, you can negotiate with them for a fair price of the shares they hold, compensate accordingly, and buy back.

Comply with Legal Requirements

Every state has separate corporate statutes governing the removal of shareholders and other regulations. Consult with your attorney legally by reviewing your state’s corporate law.

Finalize the Removal

After properly executing the above mentioned steps, you can finalize the removal process. It includes passing the removal resolution, updating the company records to reflect the ownership change or providing necessary documentation to remove them.

Why should I consult a Financial professional in removing a shareholder from a company?

Here we listed out few reason why you consult a professional before taking actions to remove the shareholders from the company.

• Legal Expertise – The professionals will have an in-depth knowledge of company laws and regulations; they can work on the legal measures to remove them and review the relevant documents to ensure compliance.
• Risk Mitigation – Professionals can help avoid that through their knowledge and expertise and save the company from legal and financial liabilities.Proactively addressing and resolving the challenges helps minimize disruptions to business operations and ensure continuity.
• Strategic Advice – When removing them, the company requires strategic advice on how that removal could impact them, how to negotiate, and the legal changes to follow. A professional can do all these according to the circumstances and objectives.
• Conflict Resolution – Involuntarily removing a shareholder from the company can lead to conflict. Professionals can act as neutral and unbiased mediators to resolve disputes. They can help mitigate issues and reach mutually acceptable resolutions through their expertise in conflict resolution.
• Compliance and Documentation – Compliance is one of the major reasons why you should consult a professional when removing a shareholder. Professionals often oversee and guide in preparing and executing the legal documents for removal.
• Efficiency and Effectiveness – A professional streamlines the removal process by efficiently managing and coordinating it with all the stakeholders involved. The time and cost invested in getting professional help will be worth the services you get.

FAQs

Here we added few frequently asked questions of shareholder removal from companies.

How do you exit a shareholder in a company?

This often requires adhering to the company bylaws or agreement terms. Generally, stakeholders may pursue buyout agreements, board approvals, or initiate legal action if they contest the terms.

Can a 25% shareholder be removed?

Yes, holding 25% of shares is possible when the removal resolution passes 75% of the majority vote. This can happen when there are no legal violation reasons for removing shareholders.

What is the exit agreement for shareholders?

After removing a shareholder, the company has to have a non-compete agreement with them, which limits them from joining rival companies for a specific number of days; this is called exit agreement.

What is the lock-up period for shareholder agreement?

Lock-up periods usually last 90 to 180 days, with 180 days being the most common duration. Occasionally, lock-up periods can be as brief as 90 days or as long as one year.

Manage and Distribute your Company Shares on Eqvista!

Removing a shareholder from your firm legally requires knowledge of the particular corporate regulations in your state. Seeking legal counsel is advised while managing these intricate regulations. When your attorney has insights into your company’s rules in your state, you can remove them with assurance.

To make this process more effective, you can rely on Eqvista. We help make issuing and administering your shares easier and more secure. We help retain investors’ confidence and guarantee compliance. Eqvista’s advanced features make tracking share allocations and managing shareholder information easier.

Contact us now to find out how we can help your share issuance and management process!