Shareholders don’t always work out. Whatever the reason, there sometimes comes a point where one shareholder wants to cut ties with another in their company. While it’s a complicated process, it’s not impossible – especially if you take precautions. Here are five steps you should consider taking when making moves to remove a shareholder.
Before acting, especially without a shareholders’ agreement in place, you need to reach out for professional insight to avoid any legal issues. While you might think the process is simple, it requires much thought and attention.
“In short, removing a shareholder is not something for amateurs,” said Stanley P. Jaskiewicz, esquire at Spector Gadon Rosen Vinci P.C. “You should consult with counsel, under attorney-client privilege, as early as possible. An agreed-upon voluntary buyout between the company and the targeted will almost certainly cost far less than the expense of a contested removal.”
Professionals can help you approach the matter in an objective, negotiable manner, while ensuring you meet any regional requirements in your area. This is crucial in any business decision, particularly ones that might cause tension among business partners. You don’t want to skip this step in the interest of time or money.
“In some cases, the expense of an independent attorney may even be necessary, if the company’s counsel has ethical or legal obligations to the target of the removal,” said Jaskiewicz.
Don’t go it alone. Consult your attorney and other relevant professionals before taking any action.
Without an agreement or a violation of it, you’ll need at least 75% majority to remove a shareholder, and said shareholder must have less than a 25% majority. The removal is accomplished through votes, and the shareholder is then compensated upon elimination, according to Masterson.
While claiming majority might work in some cases, it doesn’t against majority shareholders who already acquire more than 50% majority alone, or even majority shareholders with more than 25% majority.
If all else fails and you find yourself with no legal reason to remove the individual, you should sit down and negotiate with them, discussing a fair value of their shares.
“Although the shareholder may not be able to keep his shares, he almost certainly can dispute the value of what will be paid for the shares, and whether his removal occurred for an improper purpose,” said Jaskiewicz.
Once you reach an agreement, you can buy back and distribute their shares to individuals in the company.
“If during negotiations you succeed in ousting a shareholder, you must ensure that no shares remain unallocated,” said Anthi Pesmazoglou, legal specialist at Linkilaw. “All shares will have to be either gifted or transferred to another shareholder by using a stock transfer form.”
If they absolutely refuse to negotiate and you have no agreement in place to force the removal, you might have to face a tough decision: parting ways with the company or learning to work with the individual regardless of your concerns.
If you’re successful in removing your shareholder, proceed with caution. Because the process is often rocky, you want to impose a non-compete agreement on your departing shareholder. This will ensure they do not start or enter a business that directly competes with your organization for a set number of days after leaving.