A bad shareholder can spell trouble for any company, causing unnecessary stress and stalling growth.
In this guide we share the process of removing a bad shareholder, exploring the various legal options, negotiation strategies and preventative measures.
Identifying a Problematic Shareholder
It’s important to understand that a company is its own legal entity, which is separate from its shareholders and directors.
Shareholders play a crucial role in a company's success and their actions can significantly impact the company's growth and reputation.
A shareholder may need to be removed for various reasons, however, such as personal motives, pursuing other investments or conflicts with other shareholders. In some cases, a company may have only one other shareholder, making the removal process more complex.
You should assess the shareholder's behaviour and the impact it has on the company before taking any action.
A properly drafted shareholders' agreement is a valuable tool in detailing the necessary steps for their removal. If such an agreement is not in place, it is crucial to be vigilant and closely monitor the shareholder's actions and any impact on the company's performance.
An experienced corporate solicitor can provide valuable advice and ensure that the appropriate approach is taken. Get in touch here and we'll guide you through the process.
Assessing Your Legal Options
It's crucial to thoroughly examine your company's Articles of Association and Shareholders' Agreement. These documents will provide clarity on the rights and responsibilities of each shareholder, as well as outline the process for removing a shareholder. A meticulously crafted agreement can serve as a preventative measure against potential shareholder conflicts, helping to facilitate a smooth process for everyone involved.
Some of the most common options include:
This is the most straightforward option. If the shareholder agrees, you can buy out their shares at a mutually agreed price.
Involuntary Transfer of Shares
If there are provisions in your shareholders' agreement for the involuntary transfer of shares, this could be an option. The specifics will depend on the terms of your agreement.
Redemption of Shares
If your company's articles of association permit it, the company may be able to redeem the shareholder’s shares.
Forced Sale of Shares
If your shareholders' agreement includes a 'drag-along' provision, you might be able to force a sale of all shares if a majority of shareholders agree to it.
Liquidation and Winding-up of the Company
This is a last resort, but if a problematic shareholder is causing significant issues and there is no other solution, it may be worth considering liquidating the company. This may be done through a members’ voluntary liquidation, creditors’ voluntary liquidation or just and equitable winding up petition. Liquidating a company involves selling the company's assets, paying its creditors and distributing any proceeds among the company’s shareholders. If the company is solvent when it is liquidated, its assets could be transferred to a new company which is not part owned by the problematic shareholder.
A Shareholders' Agreement is a legally binding document outlining the respective rights and obligations of each shareholder in a company. When removing a shareholder, it is crucial to consider any clauses in the shareholders’ agreement, such as drag along and tag along clauses. A drag along clause allows the majority of shareholders to compel the minority to join in the sale of the company in the event of a buyout. Conversely, a tag along clause allows a minority shareholder to join in the sale of the company and sell their shares at the same time as the majority shareholders sell their shares to a buyer.
A well-drafted shareholders' agreement should contain provisions that facilitate the removal of a shareholder, detailing the process and consequences of their departure. The agreement can provide direction in the case of a shareholder's misconduct and can be used to remove a majority or minority shareholder who has breached the agreement.
Engaging in Negotiation
Negotiation is a critical aspect of the shareholder removal process. You should try to engage in meaningful discussions with the bad shareholder to determine a fair value for their shares. THe transfer of shares from a seller to a buyer should be properly documented with a stock transfer form being completed.
Reaching an agreement on the value of shares can be a complex process, especially if there are no exit provisions in place. Consulting an accountant can help ascertain the value of shares and avoid potential disputes. Any potential costs and taxes associated with transferring shares, such as Stamp Duty and Capital Gains Tax, should be considered.
If a shareholder refuses to negotiate and there is no agreement in place to compel their removal, the company might face a tough decision. A well-drafted shareholders' agreement should outline the process for determining the value of shares and include a calculation to ascertain their fair value. This should save both the company and the exiting shareholder time and money.
Using Majority Votes
Using majority votes can be an effective method for resolving a shareholder dispute. Majority voting blocs on either the board of directors or amongst the shareholders can be used to approve certain decisions. Considering who controls the board of directors and who controls the shareholders can be an effective tool in passing director or shareholder resolutions and determining a company’s strategy and operations.
Buyout strategies serve as a powerful tool to secure a controlling stake in a private company, with the objective of increasing profitability through changes in management, strategy, financing or operations.
Implementing a buyout strategy can prevent a departing shareholder from starting a competing business, which can maintain the company's stability and facilitate its growth.
Director and Employee Roles
When removing a shareholder who also serves as a director or employee of the company, you should address their discrete roles as shareholder and director or employee separately. Different legal procedures apply to each category.
The removal of a director requires convening a general meeting, at which the majority shareholders will pass a resolution approving the director's removal. The employment contract of any employee should be terminated in accordance with the company’s employment law obligations. The company should adhere to a proper disciplinary and termination process to avoid any potential claims for unfair or wrongful dismissal.
Updating Company Records
As part of the shareholder removal process, the company is required to update its records and notify Companies House of any changes in its shareholders and directors. The company’s directors are required to maintain an up to date register of members and directors by documenting any changes, including by providing updated information in the company’s annual confirmation statement to Companies House.