How to Remove a Minority Shareholder: Everything You Need to Know
If you need to know how to remove a minority shareholder, you can do such things as offering that person a good deal to buy the shares, or leave entirely and start a new company. 3 min read
If you need to know how to remove a minority shareholder, you can do such things as offering that person a good deal to buy the shares, or leave entirely and start a new company. Many owners deal with burdensome minority shareholders, but there are ways you can fight back. Further, the original shareholders of a business will undergo the following the issues:
- A case where major disagreements will take place
- Disposing a certain portion of an interest
- Admission of new owners
- Transference of equity to members of the family who may not have direct involvement in the company
Many company owners may attempt to plan for such events, and all contingencies should be stated in your company’s operating agreement or corporate bylaws. Such agreements may include the following rights:
- Periodic put rights
- Transfer restrictions
- Call rights
- First refusal rights
Its hard, however, to foresee all contingencies, and it may not be possible for owners to reach a settlement upon a complete set of acceptable contingencies. However, cases arise where they prevent the declaration of dividends. The removal of a minority owner will be easiest if you have a shareholder agreement that’s well-drafted. Such a contract will stipulate that a majority shareholder could purchase out the minority at a set price, or at a price determined by mechanisms noted in an agreement.
Importance of Written Agreements
If you don’t have a contract in place, or if the agreement does not include a purchase-out clause, you must consider other alternatives. If you do not have a written contract, you should negotiate a purchase of the minority share. The selling of minority shares in a closely held corporation will usually be held at a discount, but you should still make an offer that’s reasonable. Otherwise, the shareholder would refuse the offer.
If you cannot come to a proper agreement, there’s no easy way to force the shareholder to sell his or her shares. A majority shareholder must address the reason why a minority shareholder refuses the offer and must negotiate accordingly. If the minority shareholder is interested in the value only, you should try to meet that shareholder’s request as close as possible.
If they refuse a fair deal, they may value something else besides monetary value. If you address the non-monetary purpose, that person may be willing to sell the shares.
When trying to remove minority shareholder incentives, you should not engage in what’s called minority shareholder oppression. If you engage in such a practice, the shareholder can choose an equitable solution. To avoid minority shareholder oppression, you should keep in mind the following:
- The withholding of profits or refusing to dispense dividends
- Acting against the terms of a shareholder contract
- Violating shareholder rights
- Withholding vital information that a shareholder would otherwise receive
The main rule to keep in mind is that a company should be operated for the benefit of all shareholders involved and not for majority-interest shareholders only. However, this leaves you with many options at your disposal:
- Stop doing business with that person if they function in another capacity, such as being a consultant or vendor
- Run the business as you deem necessary since you are still a majority stakeholder. You may also block the shareholder from getting a say in company matters. However, ensure that you act within the procedures of corporate bylaws
- Terminate that person’s employment as prescribed under labor laws and the agreement
When minority shareholders find out that shares do not give them access to decision-making authority, they may change their minds and accept your offer. However, be prepared that a minority shareholder may not sell under any circumstances. According to Texas law, for instance, your options would be the initiation of a free-out merger, which entails starting a business in the form of the following:
- Limited partnership
- Limited liability company
Creating a new entity forces the minority shareholder to accept a merger and does not include the active involvement of the minority shareholder. When it comes to an LLC, the process in initiating a merger will be governed under the operating agreement. Without an agreement, the majority owners who do not need to own majority interests can approve the merger. In closely knit corporations, minority shareholders may dissent from a merger, which may complicate matters, but they cannot stop the merger process.
To learn more about how to remove a minority shareholder, you can post your need, or post your job on UpCounsel’s website. UpCounsel’s lawyers will aid in removing unwanted minority shareholders, regardless of your circumstance. Moreover, they will represent you if a shareholder matter ends up in court.