One of the biggest benefits of setting up as a limited company is flexibility. Business and market sectors are constantly changing as are shareholders’ circumstances. Being able to remove a shareholder quickly and efficiently and in a way that avoids a dispute developing is essential.
Complications can arise when the shareholder to be removed is a director or employee of the company or a shareholder dies. These and other scenarios will be addressed below.
The Main Methods for Removing a Shareholder
There are several ways shareholders can be removed, namely:
Share Transfers
If a shareholder decides that want to cease being a member of the company, they can choose to gift or transfer their shares. A Stock Transfer Form will need to be completed and sent to HMRC. If the shares are sold for over £1,000, Stamp Duty may apply. In the case of shares being sold at a profit, Capital Gains Tax may be applicable.
Buying Out
There is no automatic legal right to force a minority shareholder to sell their shares. Therefore, if there is a fallout between shareholders, this is often the desired option.
The first port of call in such a situation is the company’s Articles of Association and Shareholders’ Agreement. They may contain provisions that force minority shareholders to sell their shares. The Shareholders’ Agreement in particular may contain a ‘bad leavers’ clause that provides a formula for calculating a ‘fair value’ for the shares.
If this route fails, a Special Resolution may be passed to amend the Articles to force a sale. A Special Resolution requires a 75% majority. It is extremely important to get legal advice before going down the Special Resolution route as you may end up with the minority shareholder making a claim for unfair prejudice under section 994 of the Companies Act 1996.
In cases where the relationship has completely broken down, it is sometimes best to get a Corporate Law Solicitor to negotiate a buy-out deal on your behalf.
Liquidating the Company
The last-resort option is for 75% of the shareholders to wind up the company. This can be done if the company is solvent. The majority shareholders can then form a new company and exclude the unwanted shareholder from joining.
This tactic is risky, especially if your organisation has a strong brand, and should never be done without seeking advice from an experienced Solicitor.
What Happens if a Shareholder Dies?
A deceased member’s shares will normally be transferred to a named beneficiary in their Will or allocated between existing shareholders. Regardless of how the shares are distributed, the company director will need to fill out a Stock Transfer Form.
What If the Shareholder is a Director/Employee?
There are specific provisions under the Companies Act 2006 for removing a director. The majority shareholders can remove a director by passing an Ordinary Resolution (51%). However, you will need to look at share transfers, buying out their shares, or winding up the company (see above) to remove them as a shareholder. You must also be careful when dismissing them as they may bring an unfair dismissal claim if you do not follow the correct procedures.
Do I Need to Inform Companies House if a Shareholder is Removed?
You will need to update the company’s Registrar of Members and inform Companies House if a shareholder is removed. This is a legal requirement and must be done by the company director/s.
Can Disputes Be Avoided?
It is always the case that no one ever thinks a dispute can develop until it actually does. Even if the shareholders in a company are predominantly friends and/or family, it is essential to have well-drafted Articles in place as well as a Shareholders’ Agreement. The latter should set out the process for dealing with disputes before they become litigious. The money you invest in the beginning when you first set up your company, pales in comparison to the stress, worry, and legal fees associated with a shareholder dispute. And that is not taking into account the loss of business and potential reputational damage that can result from formal litigation.
Concluding Comments
Care must be taken when removing a shareholder as things can swiftly become bitter and this can lead to expensive, time-consuming, not to mention stressful legal disputes. The best way to protect the interests of your organisation is to work with an experienced Corporate Law Solicitor if you wish to remove a shareholder. They will minimise the chances of a dispute developing and robustly negotiate a settlement.
How We Can Help
As experts in corporate law, we can provide expert advice and representation on all company law matters, including removing shareholders and drafting Articles of Association and Shareholder Agreements. Contact us on 0330 173 6983 or send us an email for more information.
