Key Takeaways

  • Having a comprehensive shareholder agreement is the most effective way to remove a minority shareholder.
  • Legal remedies for shareholder disputes include buyouts, derivative actions, and forced mergers.
  • Shareholder oppression claims can significantly affect the removal process.
  • Involuntary removals must align with fiduciary duties and state-specific corporate laws.
  • Valuation disputes often arise and may require third-party neutral appraisers or court intervention.

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:

  1. A case where major disagreements will take place
  2. Disposing a certain portion of an interest
  3. Admission of new owners
  4. 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:

  1. Periodic put rights
  2. Transfer restrictions
  3. Call rights
  4. 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.

Legal Grounds for Removal Without Agreement

If there's no shareholder agreement or buy-sell clause, removal becomes more complex and often requires legal action. Options may include:

  • Involuntary Buyout via Lawsuit: Courts may order a buyout if the minority shareholder engages in misconduct or if the relationship has irretrievably broken down.
  • Dissolution Actions: In rare cases, courts may dissolve the corporation due to deadlock or oppressive conduct.
  • Derivative Lawsuits: Majority shareholders may bring claims alleging that the minority has harmed the corporation.
  • Forced Mergers or Entity Restructures: Particularly in jurisdictions like Texas, majority shareholders can initiate a statutory merger into a new entity that excludes the minority, provided statutory procedures are followed​.

These options must be handled carefully, as courts scrutinize actions that appear to disenfranchise minority interests.

Giving Incentives

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:

  1. The withholding of profits or refusing to dispense dividends
  2. Acting against the terms of a shareholder contract
  3. Violating shareholder rights
  4. 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:

  1. Stop doing business with that person if they function in another capacity, such as being a consultant or vendor
  2. 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
  3. 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:

  1. Limited partnership
  2. Corporation
  3. 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.

State Law Variations in Shareholder Removal

Each state has its own corporate statutes governing shareholder rights and removal processes. For example:

  • Delaware: Strong emphasis on contractual rights—removal usually hinges on the shareholder agreement.
  • California: Provides specific statutory protections for minority shareholders and more robust shareholder rights.
  • Texas: Permits freeze-out mergers under specific conditions, often favoring majority interests if procedures are followed lawfully.

It’s essential to evaluate your state’s corporate law before initiating any removal to ensure compliance and minimize legal exposure.

Valuing the Minority Shareholder’s Interest

One of the biggest challenges in removing a minority shareholder is agreeing on share value. Common valuation approaches include:

  • Fair Market Value (FMV): May be discounted due to lack of control or marketability.
  • Book Value: Based on the company’s financials; simple but may not reflect true value.
  • Appraised Value: Determined by a third-party valuation expert, often used in contentious removals.

If the shareholder contests the value, a neutral appraisal or court determination may be necessary. The process should be transparent and well-documented to avoid future legal disputes​.

Avoiding Minority Shareholder Oppression Claims

Shareholder oppression occurs when the majority's actions are unfairly prejudicial to the minority. Common acts that lead to such claims include:

  • Diluting minority ownership through issuing new shares
  • Denying access to financial records or meetings
  • Terminating employment tied to share ownership
  • Freezing out the shareholder from decisions without legal justification

Courts often protect minority shareholders in closely held corporations. A successful oppression claim can result in damages, forced buyouts, or even court-ordered reinstatement. Always consult legal counsel before taking removal steps to ensure actions are not construed as oppressive​​.

Frequently Asked Questions

1. Can I remove a minority shareholder without a shareholder agreement? Yes, but it typically requires negotiation, legal action, or corporate restructuring such as a merger. It's more complex without contractual provisions.

2. What is minority shareholder oppression? Oppression involves actions by majority shareholders that unfairly prejudice minority interests, such as withholding dividends or access to company information.

3. How is a minority shareholder’s share valued during a buyout? It can be based on fair market value, book value, or a third-party appraisal. Discounts for lack of control may apply.

4. Can a shareholder be removed for being disruptive? Potentially, yes. If their conduct harms the business or violates duties, legal avenues like a buyout or derivative lawsuit may be viable.

5. Is court involvement necessary to remove a shareholder? Not always. A well-drafted agreement can allow for voluntary buyouts, but contentious removals often require court intervention.

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.