Can You Remove a Shareholder?

In some companies, especially smaller or closely held companies, shareholders take an active role in the operation of the company. Some may even serve dual roles, as both shareholders and officers. But sometimes, things go wrong, and a shareholder has to be removed.

That shareholder isn’t going to leave willingly. So how do you go about removing a shareholder?

Read the Agreement and Bylaws

One very obvious way is to read the shareholder’s agreement and follow its procedures—in any company giving out stock or shares, there should already be a comprehensive shareholder agreement that the shareholder agreed to when the shares were first purchased.

Many shareholders agreements will say that a shareholder can be removed for violating the company bylaws or for violating Florida law. That means that even if your shareholder’s agreements aren’t super specific, if there is a violation of law, for example, the shareholder breached his or her fiduciary duties to the company, the shareholder can be removed.

The Procedure

Remember that there is not just merit to worry about (that is, why is the shareholder being removed), but also procedure—even if you have a very valid reason for removing the shareholder, you still have to follow the procedures set forth in your bylaws as to how to go about the removal in a legal way.

In many cases, the Board of Directors may have to vote on the removal. This can lead to politics and lobbying within your board. However, when a shareholder is breaking the law, or hurting the company, the Board may not have a choice—removal may be necessary in order to protect the company and for the board members themselves to abide by the law—in other words, the board members may be legally obligated to remove a shareholder that is breaking the law.

Buyouts and Transfers

Some shareholders agreements have buyout provisions. Some will have a formula as to how much the shareholder will be paid for his or her shares, but some do not, which can lead to disputes and even litigation over the value of the shares.

In any buyout arrangement, you’ll want a release and a hold harmless, eliminating the possibility of being sued after you’ve paid the shareholder a lot of money.

Legally, someone’s shares have to go somewhere. They can be reallocated to existing shareholders or sold to someone else. They cannot, however, hang in limbo. In some cases, you may be able to negotiate a private sale of shares to another shareholder, or to allow the disposed shareholder to transfer shares to a friend or family member, if you are OK with that happening.

Officer Shareholders

Also remember that if a shareholder also serves as an officer, removal as a shareholder won’t terminate that person as an officer, and vice versa. Your bylaws may have separate procedures on removing someone from both positions.

Call the West Palm Beach business litigation attorneys at Pike & Lustig to help you manage and run your business without legal issues.

Sources:

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0607/Sections/0607.0732.html

floridabar.org/the-florida-bar-journal/no-written-shareholder-agreement-a-survey-of-florida-shareholders-statutory-rights/