How to Remove a Shareholder

Business has many aspects to it, and often, there are problems that force your hand. One such case can be linked to shareholders. Shares are often given to individuals in exchange for capital, whether to expand the business or give it a financial injection.

Most of the legal obligations that need to be followed by a company are set out in the Companies Act 71 of 2008. It explains what needs to happen with regard to shareholders, directors and any other aspect of “being a company”.

According to the law, there are no detailed steps specifically focused on the removal of a shareholder. However, it is stipulated that a shareholder may not be forced to sell or let go of their shares. This is because shares deal with ownership, and not the operation of a company.

Why Remove A Shareholder?

The truth of the matter is that removing a shareholder is a last resort in a difficult situation. No business starts out thinking about how relationships are going to end.

As Stirk Law explains, the company is a legal entity in its own right, apart from its shareholders or directors. The nature of the shareholder relationship, however, means that it has a powerful impact on the company’s direction and future.

When a shareholder is removed, the reasons are usually one of the following: Conflicts with shareholders, pursuing other investments, and personal motives (good or bad).

Where the choice to remove a shareholder isn’t the shareholder’s choice, there are many complexities at play. The rest of the shareholders will need to identify the impact the shareholder has on the company before taking any action. This can be reputational, financial and operational (i.e. making a productive, functional work environment impossible).

If you drafted a solid shareholders’ agreement beforehand, it should also detail the steps for a shareholder’s removal. But if this is not available, it is recommended that you reach out to a professional solicitor to provide legal advice.

A shareholders’ agreement will have clauses that stipulate what the agreement is with regard to removing a shareholder, which will determine your next steps.

The Shareholders Agreement

A shareholders’ agreement is the document that outlines what is expected of the individual shareholders and what their rights are. Valuation mechanism and processes to buy shares are included in the document. The agreement guides them in how to act in the best interests of the company, as well as highlights what the company provides in return, like dividend payments

The binding document outlines the right clauses that pertain to removing a shareholder, such as grounds for removal (breach of contract or misconduct), or protection against removal. A drag-along clause, for instance, permits the majority of shareholders to compel the minority to join in the buyout of a company.

In some cases, a forfeiture of shares can be provided as a penalty, but this is extremely aggressive and is only used in extreme cases.

Your Legal Options

To ensure the entire process – that is already going to be tedious – runs as smoothly and conflict-free as possible, you must factor in your legal options. In all cases, it is recommended that you approach this matter with legal counsel at your side.

Share Buyout

The simplest option at your disposal is to buy the shares from the individual who is being removed. It can conclude if all parties agree to both the buyout and the price.

Involuntary Transfer of Shares

The involuntary transfer of shares will only occur if a strict shareholder agreement made provision for it. This refers to the strict and aggressive penalty earlier mentioned.

Forced Sale of Shares

A ‘drag-along’ provision forces a minority shareholder to sell their shares in the event of a company being sold.

Liquidation

Liquidation is another last resort to be taken if you are dealing with a problematic shareholder. It involves selling the company’s assets and settling debts before distributing any remaining money to the shareholders.

It is important to note that attempting to resolve disputes should be the first step in resolving problems between shareholders. Yet, a problematic situation might call for escalating the matter. Attempting to negotiate the removal process. The best-case scenario should be that the two sides part ways amicably and under acceptable terms.

Where a shareholder is unwilling to part ways, the dispute will need to be resolved legally, because the individual still has rights that need to be protected.