Setting up a company or attracting new investment is an exhilarating time. Shareholders provide the capital lifeblood that allows an organisation to grow and prosper. However, when you are in the day-to-day zone of running your SME, it can be easy to forget the strict regulations that apply to companies when it comes to adding and removing shareholders. Lawfully removing a shareholder involves understanding the key legislation that governs the issue and having expertly drafted Articles of Association (Articles) and Shareholders’ Agreement to mitigate the risk of disputes.

Before looking at the options for removing a minority shareholder, here’s a quick explanation of what a minority shareholder is.

What is a minority shareholder?

Minority shareholders, defined as those who own less than 51 per cent of the shares in a company, have specific rights.

The rights of minority shareholders depend on the percentage of shares/voting rights they hold. Shareholders who hold a minimum of five per cent of the company’s shares have the right to:

• Apply to the Court to prevent the conversion of a public company into a private company.
• Call a general meeting.
• Force the distribution of a written resolution to shareholders, and
• Require the passing of a resolution at an AGM of a public company.

Shareholders who hold at least 10 per cent can also:

• Call for a poll vote on a resolution.

Shareholders with more than 10 per cent of a company’s shares can:

• Prevent a meeting from being held on short notice (this applies to private companies).

Shareholders who hold at least 15 per cent can also:

• Apply to the Court to cancel a variation of class rights, provided those shareholders did not consent to or vote in favour of the variation.

And finally, at more than 25 per cent shareholding:

• Shareholders have the right to prevent the passing of a special resolution.

Why would I want to remove a minority shareholder?

One of the most common reasons the removal of a minority shareholder is sought is due to a dispute. For example, one or two minority shareholders may be suspected of using company property for their own benefit or not pulling their weight when it comes to workloads. Another typical reason for removing a minority shareholder is that the shareholder has died. Finally, a shareholder may want to leave the company to liquidate some cash or pursue other investments.

What are the main ways to remove a minority shareholder?

Most minority shareholder removals are managed through:

• Share Transfers – in circumstances where the shareholder wishes to exit the company, they can transfer their shares using a Stock Transfer Form.
• Majority purchases the minority shares – if a dispute has developed, you can’t force a shareholder to transfer their shares. You’ll need to check the company’s Articles and Shareholders’ Agreement to see if any provisions have been made for compulsory buyouts of members’ shares. If there is not, you can pass a Special Resolution (75%) to amend the Articles to allow majority shareholders to purchase the minority shareholder’s shares. The risk you run; however, is that the minority shareholder will bring an unfair prejudice claim under section 994 of the Companies Act 1996. Therefore, you should always get legal advice before taking this step.

Can I close and then re-open the company and exclude the minority shareholder?

In theory, yes, you could wind up the company if 75% of shareholders agree to do so. This is the nuclear option and should only be used as a last resort. You need to be confident that your brand can survive the liquidation and re-opening of the company. As with the Special Resolution option, this option should never even be contemplated without getting advice from your Solicitor.

How do I remove a shareholder who has died?

If a shareholder dies, their shares in the company may form part of their estate. Again, the first place to check is the company’s Articles or Shareholders’ Agreement. One or both documents may state that the surviving shareholders have first option to purchase the deceased’s shares. Only if they choose not to buy the shares can the shares be transferred to a third party or beneficiary of the Will.

Can minority shareholder disputes be prevented?

Absolutely, provided you do your due diligence and risk assessments when starting your company and whenever someone new invests. Most disputes can be nipped in the bud quickly by having your Articles and Shareholders’ Agreement drafted by an experienced Virtual In-House Legal Counsel who has taken the time to understand your organisation and market sector.

If a dispute has developed and the relationship breaks down completely, often the best option is to have your Solicitor negotiate purchasing the minority shareholder’s shares so everyone can have a clean break and move forward amicably.

Getting legal help

Our expert Virtual In-House Legal Counsel team has the knowledge and resources needed to draft a comprehensive Shareholders’ Agreement bespoke to your company. Also, should you not have an agreement in place and you are experiencing a deadlock situation or some other type of shareholder dispute, such as a claim under section 994 of the Companies Act (unfair prejudice), our Shareholder Dispute Resolution Solicitors can advise and represent you. We will work to resolve the dispute as quickly and cost-effectively as possible whilst ensuring your best interests are protected.

To find out more about any matters discussed in this article, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article, please contact 43Legal.