How can a business remove a troublesome shareholder?
There are many reasons why shareholders fall out. Most companies in the UK are small owner-managed businesses, which are family businesses or have been started out by friends with a common aim. Over the years people and priorities can change and no longer align. For example, not all shareholders will agree on the direction the business is moving in, or one shareholder may believe they work harder than the others, or one may disagree with the size of another shareholder’s director’s loan account, or think someone is incompetent, or taking too much pay.
While a minority shareholder may feel stuck in a difficult situation, in fact they are not powerless and they have options. While it is not easy to remove a shareholder who does not want to go, there are various methods available to enable this.
‘When shareholders engage in a dispute that amounts to a deadlock, this is often due to the personal nature of the relationships involved and it can be hard to move forward without independent legal help,’ says Simon Steele-Williams, dispute resolution solicitor with Parfitt Cresswell in Uckfield. ‘An ongoing dispute between the business owners will be a big distraction for the business, and this can have serious consequences if allowed to continue without resolution.’
Simon outlines how your solicitor can help if you find yourself wanting to remove a fellow shareholder.
The role of Articles of Association and shareholder agreements
The first step towards removing a shareholder is to check if you have a shareholder agreement. Much like signing up to a prenuptial agreement before marriage, shareholders can save a lot of time, money, and stress by agreeing how to split up while they still like each other, rather than when they have fallen out.
A well drafted shareholder agreement should set out what will happen in the event of a dispute, and provide the method for the removal or exit of a shareholder. If clear terms are available, it is possible to remove any shareholder. While a shareholder agreement cannot resolve an entrenched deadlock, it can be a valuable tool in helping to shift focus and resolve conflict.
Alternatively, there may be provision in the Articles of Association that can help determine how a shareholder can be removed, allowing the majority shareholders to force the minority shareholders to sell their shares.
The best approach is always to try to reach agreement on the interpretation of the shareholders agreement or articles. This can save the time and costs that it may take to resolve a dispute.
However, sometimes there is too much history and bad feeling and it is very difficult to move forward. In this case, the shareholders may need to go to court to ask a judge to resolve the matters of dispute. It must be noted that the company should not meet the costs of a shareholder dispute. This is a dispute between individuals and does not involve the company, which is a separate legal entity.
Other methods of removing a shareholder – including voluntary liquidation
If there is a complete impasse in a dispute, but a 75 per cent majority of the shareholders are in agreement, then one option for a solvent company is to place itself into voluntary liquidation. An independent liquidator will be appointed to gather in the assets of the business and distribute them to the shareholders in accordance with their shareholding. The shareholders who still wish to work together could arrange for a transfer of the company’s assets to a new company fronted by the remaining owners, leaving behind the shareholder they no longer wish to work with.
This is quite a drastic solution, and a voluntary winding up will incur costs. It can also cause temporary disruption to a business, although it does not need to if handled well and timed correctly. Before considering this solution, the majority shareholders will need to line everything up, and should take professional advice on the value of the shares on a solvent winding up to ensure the minority shareholder can be repaid without further recourse.
How do you deal with disgruntled shareholders?
A shareholder who believes that the conduct of other shareholders or directors has been ‘unfairly prejudicial’ to their interests can bring an unfair prejudice petition to court.
If the court believes they have been treated unfairly, it can order some form of restitution to the shareholder. Often if relations have seriously broken down, the court is likely to order the company to buy the shares of the minority shareholder for a value set by the court. Alternatively if one minority shareholder is causing the problems, they may be ordered to sell their shares to the majority.
Legitimate decisions made by a majority shareholder for the good of the business that a minority shareholder does not agree with will not get much sympathy from the court. But a shareholder who has been excluded and has been prejudiced as a result may be successful in their claim. For example:
- if they were not paid dividends due to them;
- if they were forcibly removed as a director or employee; or
- if another shareholder’s conduct directly affected them, such as paying themself an excessive salary.
Another example of a situation might be if there is no provision in the articles to force a sale of the shares, but the majority shareholders pass a special resolution to amend the articles to provide for this.
The court will be reluctant to be drawn into any strategic business decisions, and will expect all parties to have exhausted all measures to resolve problems outside of court first.
How can a solicitor help?
When shareholders fall out, it can be easy to lose perspective and struggle to resolve a dispute without professional help. A solicitor can bring focus back and negotiate a settlement. If agreement cannot be reached, then a solicitor can act in a structured exit or share sale, bring court proceedings for an aggrieved party, or act in the winding up and transfer of assets of the company.
Our solicitors have many years of experience in helping shareholders to resolve disputes and in removing shareholders where necessary for a business. Contact us as soon as you are aware of a potential problem. The sooner we are aware of the issues, the sooner we can help, and your business can get back to doing what it does best.
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