5 Steps to Remove a Shareholder

Understanding minority shareholder removal options

Minority exits typically follow three practical pathways: agreement‑driven exits, negotiated buyouts or structural transactions that convert shares into cash or other consideration. The available options depend on the company’s governing documents and state corporate law.

Agreement‑driven exits

Shareholders’ agreements and bylaws often include buy‑sell provisions (e.g., drag‑along, compulsory sale, call options, deadlock triggers) that authorize a forced sale at a defined price or valuation formula when specified events occur, provided notice and procedure requirements are followed.

Negotiated buyouts

When no trigger applies, owners commonly reach a voluntary stock purchase or redemption agreement that sets price, payment terms and closing mechanics. Independent appraisals can reduce later disputes over value.

Structural “freeze‑out” transactions

A “freeze‑out” (also called a squeeze‑out) is a strategy by which controlling owners compel minority shareholders to exit, commonly through a merger that converts minority shares into cash or other consideration. Jurisdictions such as Delaware provide appraisal rights in certain mergers so minority holders can seek a court‑determined “fair value.” Courts scrutinize tactics like withholding dividends, restricting information or diluting voting power if used to coerce a sale, and may review controller‑led deals under “entire fairness” (fair dealing and fair price) or provide appraisal as a statutory remedy, depending on the transaction structure.

Practical considerations when evaluating minority shareholder removal options: 

• Confirm what the charter, bylaws and shareholders’ agreement permit.
• Check voting thresholds for mergers or redemptions.
• Evaluate availability of short‑form mergers at specified ownership levels.
• Document a fair, informed process (e.g., independent committee, fairness opinion) to mitigate litigation risk.

Legal and agreement‑based methods for removing a shareholder

Here are five steps you should consider taking when making moves to remove a shareholder.

1. Refer to the shareholders’ agreement.

A shareholders’ agreement outlines the rights and obligations of each shareholder in an organization. Typically, all shareholders create and agree on it to ensure everyone is fairly represented. That way, if you want to cut ties with a shareholder down the line, you can refer to this document for guidance.

This is especially useful when removing a majority shareholder — someone who owns more than 50 percent of the company’s outstanding shares. If they violate anything explicitly stated in the agreement, you can remove them solely based on that offense.

Make sure to be specific with the agreement. It is vital that you review details that can influence how and when to remove a shareholder, as well as any consequences for doing so. Look for details like the dates, number of issued shares, anything related to shareholder equity and the rights of shareholders in the event of a company sale. You should also be on the lookout for other clauses that may impact the shareholder removal process.

>> Read next: 10 Key Considerations to Make When Selling a Business

Agreement‑based mechanisms can include buy‑sell clauses (including drag‑along and compulsory sale provisions), call options and deadlock resolution provisions that trigger a sale process. If properly drafted and adopted, these provisions provide a clear, enforceable exit path.

2. Consult professionals.

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,” Stanley P. Jaskiewicz, editorial board member at The American Bar Association, Senior Lawyers Division, told us. “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.

3. Claim majority.

If no agreement or contractual trigger exists, removing a shareholder usually requires approval by the voting thresholds set in the company’s charter, bylaws or state law. Some jurisdictions permit majority or supermajority votes for actions like amending governing documents, authorizing redemptions or approving mergers that can eliminate minority interests. However, there is no universal threshold, and requirements vary widely. Importantly, a shareholder who already controls more than 50 percent of the voting power generally cannot be forced out by vote alone. In such cases, negotiated buyouts or statutory merger mechanisms may be the only viable options.

4. Negotiate.

If all else fails and you find yourself with no legal reason to remove the individual, you should sit down and negotiate with them. Make sure to discuss a fair value for 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.

It can be helpful to consult your shareholders’ agreement and stock purchase agreement when buying and selling stocks. 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, operations manager at L-Stone Capital. “All shares will have to be either gifted or transferred to another shareholder by using a stock transfer form.”

5. Create a noncompete agreement.

If you’re successful in removing your shareholder, proceed with caution. Because the process is often rocky, you want to impose a noncompete 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.

However, it’s important to note that some state laws increasingly limit noncompetes. As a result, you can also consider non‑solicitation, confidentiality and invention‑assignment provisions as tailored alternatives where noncompetes are restricted.

Valuation and fairness in exit deals

Determining the value of a departing shareholder’s stake is often the most contentious part of an exit. Share valuation sets the foundation for negotiations, settlements or court review, and the chosen methodology can dramatically affect outcomes. Companies may rely on “fair market value,” which reflects what a willing buyer would pay a willing seller in an arm’s-length transaction. 

However, disputes often arise around whether to apply a minority discount — a reduction in value to account for the lack of control or reduced marketability of minority shares. While some private agreements and buyouts incorporate such discounts, Delaware courts in statutory appraisal proceedings generally reject minority discounts when determining “fair value,” instead focusing on the business’s overall worth.

To reduce the risk of litigation, many businesses engage independent, third-party appraisal firms to provide unbiased valuations. These appraisals may consider financial performance, comparable company data and market trends. By documenting a transparent valuation process and relying on expert analysis, companies strengthen their position in negotiations and better protect themselves from fairness challenges.

Protecting minority rights and preventing shareholder oppression

Minority shareholders often lack the voting power to control major decisions, but they are not without protections. Directors and controlling shareholders owe fiduciary duties of loyalty and care, requiring them to act in good faith and avoid self-dealing at the expense of minority investors. When disputes arise, courts closely examine whether the decision-making process was fair and whether the transaction price reflects the company’s true value.

Legal safeguards vary by jurisdiction. In Delaware, for example, there is no standalone “oppression” claim, but minority shareholders can seek remedies through fiduciary-duty litigation, statutory appraisal rights or contractual protections in governing documents. Courts apply heightened scrutiny – such as the “entire fairness” standard – when controllers are on both sides of a deal, assessing both process integrity and price justification.

To prevent disputes, companies should adopt transparent governance practices, such as independent board committees, fairness opinions and clear buy-sell agreements. These measures not only protect minority shareholders but also help reduce the risk of costly litigation and reputational damage.

Comparison table: removal approaches

Below is a visual summary to compare common removal approaches.

Best practices and preventive measures

A small amount of upfront structure prevents most removal disputes from ever arising. Codify exit triggers, valuation mechanics and decision rights in the governing documents, and run conflicted transactions through a documented, independent process.

• Use robust buy-sell agreements. Define triggers (e.g., death, disability, deadlock, misconduct), pricing formula, funding and timelines to avoid stalemates.
• Build governance guardrails. Adopt clear voting rules, dispute-resolution mechanisms and independent approval processes for related-party deals.
• Document valuation logic. Obtain third-party appraisals for significant transactions and retain all process records to support fairness.
• Plan structural options early. Where lawful, consider consolidation or merger pathways that provide statutory appraisal rights and minimize coercion risk.

Close the loop by aligning documentation, process and pricing. Memorialize approvals, give required notices and confirm that any forced exit complies with charter/bylaws and statutory appraisal frameworks to reduce litigation risk.

Skye Schooley contributed to this article. Source interviews were conducted for a previous version.