Removing a Shareholder: Everything You Need to Know
Removing a shareholder from a corporation is a very involved process. Hopefully, your shareholders agreement will have a procedure for removing a shareholder.3 min read
Updated October 30, 2020:
Removing a shareholder from a corporation is a very involved process. Hopefully, your shareholders agreement will have a procedure for removing a shareholder. Typically, removing a company shareholder requires a majority vote of your other shareholders.
Refer to Your Shareholders Agreement
Checking your shareholders agreement should be the first step you take if you need to remove a shareholder. Depending on your specific agreement, there may be a set procedure for shareholder removal. The purpose of a shareholders agreement is to define the duties and rights of shareholders in a corporation.
A shareholders agreement guarantees fair treatment of all shareholders and ensures that every shareholder knows their power and responsibilities within the company. A properly written agreement will make it easier to remove a shareholder later on.
Basically, a shareholders agreement functions as a contract that tells shareholders what they can and cannot do within the company. For instance, if your company's agreement includes rules of conduct, you should be able to easily remove a shareholder who repeatedly violates these rules.
Removing a majority shareholder, or one who owns over half of the company's shares, for violating conduct rules is easier than removing them on other grounds. If a majority shareholder breaks a rule that is specifically outlined in the agreement, you shouldn't have any trouble removing them from the company.
When writing your shareholders agreement, it's crucial that you include detailed information about your company:
- A capitalization table
- How many shares you will issue
- Rules for share transfers
- If shareholders have preemptive rights to purchase company shares
- How shareholders will get paid if the company is sold
Including the right details in your agreement will make it easier to remove a shareholder in the future.
Help From an Attorney
If you read your shareholders agreement and find that there is no protocol for removing a shareholder, there are a few ways that you can proceed.
First, check the corporate statute in your state. If your shareholders agreement does not specify how to remove a shareholder, the rules of the corporate statute will apply. Every state has its own laws for corporations and how they can remove shareholders.
Second, you should get in touch with a corporate attorney who understands the rules in your state. Your attorney can help you follow the corporate laws in your state so that the shareholder is removed properly.
Voluntary vs. Involuntary Removals and Company Resolutions
If you want to remove a shareholder, you first must decide if the shareholder is leaving the company voluntarily or involuntarily. For involuntary removals, the shareholder will usually need to have violated the shareholders agreement or company bylaws before they can be forced out of the company.
Creating a shareholder removal resolution should be your next step. After drafting the resolution, you should present it to your corporation's board of directors. Depending on your shareholders agreement, you may instead need to present the resolution to a specific group of shareholders.
The resolution needs to include the correct information before you can remove a shareholder. For instance, you need to explain the reason for removing the shareholder and include a buyout request. If you want the resolution to be as effective as possible, your reasons for removing the shareholder should include a bylaw violation. With an S corporation, for example, you could state that you are removing the shareholder because they no longer meet the Internal Revenue Service (IRS) qualifications for serving as an S corp shareholder.
An involuntary removal can only occur if your shareholders agreement describes the process for such a removal. Otherwise, you cannot force out a shareholder until they have violated the corporate statute. In most cases, this would mean that the shareholder has committed fraud. After everything is in order, your corporate secretary and board of directors should sign the removal resolution.
Next, you should convene a meeting of your company's governing board to vote on the resolution. If the board passes the resolution, you'll need another signature from your corporate secretary.
If there is no shareholders agreement in place, or if the shareholder to be removed hasn't violated company rules, the resolution must pass by a 75 percent majority vote. Also, the shareholder in question cannot own more than 25 percent of the company's shares.
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