Can You Remove a Shareholder?

When relationships between business owners break down, attention often turns to whether one of them can be made to leave. In those circumstances, the question “can a shareholder be removed?” quickly becomes both a legal and commercial concern.

The answer is not always straightforward.

In this article, Dispute Resolution Partner Layla Barke-Jones answers 13 quick-fire questions that many ask when shareholder relationships break down, including the main ways a shareholder may leave or be removed, what risks are involved if you take the wrong approach and the practical steps companies can take to protect the value and stability of the business.

Can you remove a shareholder from a company?

Yes, but it is not straightforward. Unlike a director a shareholder cannot be voted out, they need to be removed by their voluntary consent, a shareholder's agreement, provisions in the Articles of Association or a court order.

Are there limitations with removing a shareholder from limited companies?

Yes there are. Legal and contractual provisions and limitations must be adhered to, getting it wrong can be costly and could lead to a claim against those removing the shareholder.

There is no automatic right to force a sale in the law, a thorough review of governing documents is required and often there will need to be a share valuation.

What is the legal process to remove a shareholder?

This depends on whether there is provision to remove a shareholder within the Articles of Association or a shareholder's agreement, whether the shareholder is willing to leave or whether a buy-out can be negotiated. If none of these options are available it may be possible to seek an order for sale through an Unfair Prejudice petition.

What are the alternatives if there is no mechanism to remove a shareholder in the governing documents?

Negotiated buy out or settlement e.g. share buyback, third party purchase or mediation. Consider whether there is a basis to bring an Unfair Prejudice Petition.

The most appropriate route will depend on the company’s financial position, the relationship between the parties and whether an agreed valuation can be reached. Early legal advice from a specialist dispute resolution team can help identify the available options, reduce disruption to the business and avoid steps that may later be challenged.

Can a majority shareholder force a minority shareholder out?

A majority shareholder does not have an automatic legal right to force a minority shareholder to sell their shares or remove them as an owner solely because they hold more voting power.

What is the difference between removing a shareholder, removing a director, and transferring shares?

Removing a director takes away their right to manage and make daily operational decisions for the company. Removing a shareholder strips them of their ownership stake in the business. Transferring shares simply changes who owns that specific stake and can make shareholder decisions.

When can a shareholder be removed?

Governing documents can include compulsory transfer clauses and if shareholder breach terms can be forced to sell. They may also include drag along rights where majority shareholders want to sell entire company which can force minority shareholders to.

If there is deadlock a court order for unfair prejudice or just and equitable winding up of the Company may be required to break the deadlock.

What happens if a shareholder refuses to leave or sell their shares?

A shareholder who refuses to sell generally retains their stake. However, depending on company rules and the law, they can be compelled to sell through pre-existing agreements or court orders.

How is a shareholder’s stake valued if they are being bought out and who buys the shares?

A company valuation is usually required from an accountant.

What is the safest way to deal with a shareholder dispute?

Negotiation or mediation, these are confidential and doesn't damage operations or public perception.

Our Dispute Resolution team offer specialist business mediation services that can be an effective way of resolving issues amicably, without the need to go to court. 

Is negotiation, mediation, or a buyout better than trying to remove a shareholder?

In almost all scenarios yes. Trying to remove a shareholder is extremely expensive, time consuming and can derail a business unless there is a mechanism to do so within the governing documents.

What mistakes should companies avoid when trying to remove a shareholder?

Confusing a director’s role with shareholder rights, not checking the governing documents and attempting to remove a shareholder without advice as this could be prejudicial conduct.

When should you speak to a dispute resolution solicitor about removing a shareholder?

Immediately when a dispute arises or relationships begin to break down. 

Early advice from a dispute resolution team can be critical to protecting the company's position and reducing disruption to the business. 

Contact our shareholder dispute solicitors

If you are a director or shareholder of a business and require legal assistance to resolve your dispute, our Dispute Resolution team are here to help.

Led by CEO and Head of Dispute Resolution Nick Clarke, our solicitors can advise on negotiation, mediation, a structured buyout or formal proceedings if required, to find a practical solution that benefits your business. 

 Contact Our Solicitors