Disputes often arise between majority and minority shareholders, resulting in many instances, when the majority seek to expel a minority shareholder, but how can this be done? There are several possible ways of removing a shareholder, or forcing a sale of their shares, but care needs to be taken in each case, and a tactical approach is required, which means detailed legal advice should be taken.
Check the articles of association of the company to see if they contain drag along provisions which would enable the majority of the shareholders to force the minority to sell in the event of a buyout of the company.
Consider passing a special resolution (75% majority) to alter the articles to include provisions to force a sale of the shares, say for fair value. However, any alteration should not amount to an oppression of the minority and should not be unjust, and lead to further litigation.
Check if there is a shareholders’ agreement which contains a ‘buy-back’ clause which can be invoked if a shareholder leaves the company. This is sometimes known as a ‘bad leaver’ provision and will include a mechanism to value the shares.
Consider increasing the remuneration of the remaining directors, and reducing sums paid by way of share dividends. This may not be tax efficient but may be preferable to paying dividends to a shareholder who no longer participates in the running of the company. But take care, since you should be able to justify this course of action, define the business reason for the change.
Once you have assessed the Company’s, start negotiations with a view to reaching agreement for the purchase of the shares for fair value. First carry out a valuation of the shares. A minority shareholding will often be valued at a figure below what the shares would be worth based on a percentage of the whole. Check to see if the Articles contain a formula for valuing a minority shareholding.
Care should be taken to avoid a dispute which could end in costly litigation. A minority shareholder has the right to apply to the court claiming, ‘unfair prejudice’. The court will usually order a sale of the leaving shareholder’s shares at a determined value. Company litigation is expensive, and the costs would usually be paid for by the individual shareholders. However, the threat of such proceedings can be used to put pressure on the minority shareholder to reach agreement for the sale of their shareholding.
The company could consider bringing a claim against the departing director if it can show it has suffered some loss as a result of a breach of his duties as a director. Care should be taken, however, to check that the other directors have not themselves been in breach of their duties.
If the majority hold 75% of the shares, then you could consider the nuclear option of winding up the company. If a solvent company is wound up through a member’s voluntary liquidation (MVL), the company’s assets can be transferred into the name of Newco, which would not issue shares to the minority shareholder in Oldco.
NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is firstname.lastname@example.org.