A shareholder is a person, company, or organization that holds stock(s) in a given company. Any party involved in a business that wants to reach this status must own a minimum of one share in the company’s stock or mutual fund. The influence of a shareholder on a company is determined by their shareholding percentage owned.

But what to do in case things take a wrong turn and the relationship with a shareholder fails? The short answer is: it is possible to remove a shareholder from a corporation. However, this option may lead to possible complications, as even when a shareholder agreement can be removed, doing so can result in lawsuits.

In this article, we show how you can proceed to avoid further issues in case a shareholder removal from a corporation takes place.

First Step – Reviewing the Shareholder Agreement in Detail

The shareholder agreement is a type of contract that provides guidelines for proper shareholder conduct. Once a shareholder fails to fulfill their duty by following the guidelines stated in the shareholder agreement, it is possible to remove the shareholder for misconduct.

In any case, the quintessential aspect of removing a shareholder from a company is reviewing the shareholder agreement in detail. This resourceful piece of contract may provide a valid ground for the removal of a shareholder.

Nevertheless, hardship lies ahead in case you want to remove a majority shareholder, which is inherently more difficult. As a majority shareholder holds more than 50% of the voting rights in the company, it is almost impossible to imagine a feasible situation in which this individual could be removed.

In such a case, factual provisions within a shareholder agreement may help in the process of removal. When a majority shareholder violates any rules of conduct stated in the shareholder agreement, this action may provide solid ground to simplify the removal procedures.

Regardless, it is fundamental to remember that the involuntary removal of a shareholder opens up the possibility for legal proceedings in the future.

Examining the Shareholder Agreement

Generally, shareholder agreements provide useful information that can be used in case of shareholder removal, such as:

  • The number of issued shares.
  • Restrictions/ transferring shares.
  • Shareholders’ rights to purchase shares.
  • Details regarding the sales of shares.

There are cases in which a shareholder agreement will not provide for proper removal procedures. In such cases, a skilled business attorney must be consulted to determine the possible removal options.

Can a Shareholder Employee be Fired?

In case a shareholder is also an employee, there are other valid grounds for a possible shareholder removal. Shareholders who do not have control of the business can usually be fired by the controlling owners (majority shareholders).

It is possible to terminate a minority shareholder’s employment. However, it is essential to review the employment contract and shareholder agreement in detail, as it could lead to further legal issues.

Another essential measure would be to consult a business attorney to anticipate unexpected liabilities.

Removing a Shareholder Indirectly – Feasible Solutions

There are situations in which available removal solutions may fail. Various reasons can play a major role in this type of outcomes, such as the lack of a shareholder agreement or the non-existence of violations that justify the removal.

Nonetheless, it is still possible to remove a shareholder indirectly, encouraging them to leave the company amicably.

Buyout Shareholder

Removal may still be possible even if the shareholder does not violate the terms of the shareholder agreement. When examining the shareholder agreement, it is possible to seek a buyout clause.

A buyout clause permits the purchase of a minority share for an agreed-upon price, which prevents minority shareholders who cannot be voted out from refusing to surrender their shares.

Sell Shares

Another possibility is negotiating with the minority shareholder to sell their shares. It is technically possible to force a shareholder out, but this approach would leave plenty of room left for further legal issues.

In such cases, presenting a reasonable offer can play an important role to encourage the shareholder to accept. We recommend anyone to seek professional guidance in this situation, to prevent any activities that can constitute minority oppression.

Feasible elements that can constitute a claim for minority oppression include:

  • Violation of minority shareholder rights.
  • Withholding information from a shareholder.
  • To go against specific provisions stated in the shareholder agreement.
  • Withholding profits or dividends from a shareholder.

This type of issue may lead to a negative outcome. For instance, an oppressed minority shareholder can ask the court to dissolve the company, or even to hold the corporation’s leaders accountable for their liabilities.

Meanwhile, there are other ways to encourage a minority shareholder to sell their shares, such as:

  • Termination of shareholder employment
  • Reduction of shareholder authority

But then again, both measures require a detailed review of the termination procedures contained in the employment and shareholder agreements.

You Do Not Need To Face Uncertainty When Removing a Shareholder from Company:

Any process that involves shareholder removal from a corporation requires an expert approach. A skilled attorney from Jurado & Farshchian, P.L. will provide all necessary guidance. Call (305) 921-0440 or send an email to Romy@jflawfirm.com to get help.

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