Shareholders do not always work out. When a corporation or a business needs to remove a shareholder, what steps must be taken? Will the shareholders who remove another shareholder face legal challenges? How can a business law firm in Florida help?

Removing a shareholder is complicated, but if the other shareholders take the right steps, a shareholder can be removed without any violation of the law. This is a brief discussion of the steps that shareholders must take to remove another shareholder from their corporation.

STEP #1: READ AND UNDERSTAND THE SHAREHOLDER’S AGREEMENT

A shareholders’ agreement spells out the obligations and rights of a corporation’s shareholders. It ensures that shareholders are treated and represented fairly and equally. The agreement should spell out in the most precise language possible exactly how to cut company ties to a shareholder.

If the language in the shareholders’ agreement is clear and precise regarding when and how a shareholder may be removed, the removal process will be much easier.

business partners in a meeting

Shareholders without the control of a business can typically be removed by the controlling shareholders for any violation of the company’s bylaws or the shareholders’ agreement.

WHAT ABOUT MAJORITY SHAREHOLDERS?

However, even someone who owns more than fifty percent of a company’s outstanding shares can be removed if there has been an explicit violation of the terms and provisions of the shareholders’ agreement or the company’s bylaws.

If a shareholder also has an employment contract with the company, the contract will have to be closely scrutinized to avoid any unanticipated legal difficulties.

A buyout provision should also be a part of every shareholders’ agreement. Corporate shareholders in this state should have their shareholders’ agreement drafted by an experienced Daytona Beach business attorney.

WHAT SHOULD BE INCLUDED IN A SHAREHOLDERS’ AGREEMENT?

When you create a shareholder’s agreement, you will need to include a number of precise items about the company, such as:

  • a capitalization table
  • the number of shares that will be issued
  • directions for transferring shares
  • the rights of shareholders to acquire company shares
  • how shareholders are paid if the business is sold

If you need to remove a shareholder, having the details as complete and as accurate as possible in a shareholders’ agreement can make the removal process significantly easier.

business partners and disputes

If you already have a shareholders’ agreement established, allow your business attorney to review the current agreement to ensure that it’s fair, enforceable, and that it meets the company’s current needs.

STEP #2: TO REMOVE A SHAREHOLDER, HAVE RELIABLE LEGAL ADVICE

When a shareholder needs to be removed, it is important to consult as early as possible with a reliable and skilled business lawyer. Your business lawyer may be able to help you negotiate a voluntary buyout and avoid legal action by the targeted shareholder.

A business lawyer will review the pertinent documents, apprise you of your company’s legal rights and options, and help you move forward with the removal process in the most effective and legally appropriate manner.

STEP #3: CREATE A REMOVAL RESOLUTION

With almost no exceptions, there must be some violation of the company’s bylaws or its shareholders’ agreement when a shareholder is being forcibly removed from the company.

shareholder agreements

When you understand your shareholders’ agreement and have reliable legal guidance, a shareholder removal resolution may be the best next step to take in the removal of a shareholder. Have your business attorney review or help you draft the removal resolution.

You may need to present the resolution to your corporate board of directors or to specific shareholders. It should accurately explain the cause for the removal, and it should additionally include a buyout request.

STEP #4: BE PREPARED TO NEGOTIATE AND COMPENSATE

If the shareholders have no compelling legal reason for a stockholder’s removal, they may still offer to buy the individual’s shares and to negotiate a fair price that both sides can agree upon.

It is important to understand that a former shareholder’s shares must be transferred or gifted to another shareholder. It doesn’t matter why a shareholder leaves or is removed. Your company cannot have shares that are unallocated.

Transferring the ownership of shares can be accomplished through their sale or through the gifting of the shares to others by completing a stock transfer form.

WHAT CAN HAPPEN IF NEGOTIATION ISN’T POSSIBLE?

However, if the shareholder who is being removed will not negotiate, and if you cannot compel that shareholder’s removal – if there has been no obvious violation of the shareholders’ agreement or company bylaws – a good business lawyer may be able to suggest other options.

For example, if your shareholders’ agreement does not spell out how to remove a shareholder, state law will apply. Every state has laws that allow corporations and businesses to remove shareholders. An experienced business attorney will know what steps to take.

When a shareholder is removed involuntarily, even if the shareholders have acted cautiously and have had sound legal advice, there is always the possibility that the removal attempt will trigger a legal dispute. The most serious disputes can bring businesses to a grinding halt.

disagreements in a business

The right business attorney may be able to help you resolve disputes with shareholders – and other potential legal disputes – before those disputes reach a courtroom or damage your business. An experienced Daytona Beach business attorney will be an aggressive advocate on your behalf.

IN WHAT OTHER WAYS WILL A GOOD BUSINESS LAW FIRM HELP YOU?

Along with a shareholder’s agreement, your business lawyer can draft or review your company’s articles of incorporation, bylaws, operating agreements, employment agreements, contracts, policies, and procedures.

When you form a business in Florida, putting an accomplished business attorney on your team is one of the first steps to take. As the business grows, your attorney will be able to advise and represent you and your company on a wide variety of matters that a business will face over time.

Do not wait until you need an attorney. In too many cases, that will be too late. Let a qualified business lawyer put solutions in place for your business now that will keep small disagreements and difficulties from turning into serious and costly legal disputes in the future.

A business owner needs an attorney who will offer trustworthy legal advice, who will ensure that your company is entirely compliant with the law, and who will aggressively represent you if you’re involved in a legal dispute. If you own a business, a good attorney’s help is your right.

By: Melody Lankford
After graduating from Davidson College, Melody Lankford earned her J.D. from Florida State University’s College of Law in 2004 and was admitted to the Florida Bar that same year. Ms. Lankford joined Raydon Corporation as in-house counsel in 2004. She worked there until 2012, when she founded the Lankford Law Firm. She is an experienced Daytona Beach small business attorney who offers sound legal counsel and experience-based insights to her business clients.