How do you remove a bad shareholder?

The relationship between shareholders in a business is not always that straightforward.

Priorities and attitudes change over time and what started out as a positive relationship can quickly turn sour. Jealousy plays a huge part in shareholder disputes. Very often it is a case of either I am leaving or I want him/her out of the business. Shareholders will often seek to be disruptive in order to gain advantage or they will take a passive or inactive approach which will lead to conflict. 

Shareholders can be broadly categorised into two types: majority shareholders and minority shareholders.

Majority shareholders own more than half of a company’s shares, giving them significant control over the company’s decisions.

Minority shareholders, whilst they may not have the same level of influence, hold a crucial role in maintaining a balance of power and fostering accountability within the business.

Whether you are a majority shareholder or a minority shareholder, you need to be aware of your legal rights and options when looking to remove a shareholder.

What makes a disruptive or inactive shareholder?

A disruptive or inactive shareholder may have several characteristics that negatively affect the company’s operations, culture, and overall success. Here are some traits that could indicate a problematic shareholder:

Lack of engagement

Shareholders who are disinterested or uninvolved in the company’s affairs can be detrimental. They may fail to provide valuable feedback, guidance, or support when needed.

Short-term focus

Shareholders who are primarily focused on short-term profits rather than long-term growth can push for decisions that may harm the company in the long run. For example a shareholder may pay themselves an excessive salary.

Disruptive behavior

If a shareholder consistently causes conflicts or behaves disruptively, it can create a hostile environment. This could lead to unnecessary disputes and affect the company’s decision-making process.

Lack of respect for corporate governance

Ignoring or undermining the established rules and procedures of corporate governance can lead to legal issues and conflicts within the company.

Unethical practices

Shareholders who engage in unethical practices, such as insider trading or manipulation of company assets for personal gain, can cause significant harm to the company’s reputation and its legal standing.

Poor communication

A lack of open and transparent communication can lead to misunderstandings and mistrust amongst shareholders and other stakeholders.

Understanding shareholder agreements in Ireland

A shareholder agreement can make or break a strategy to remove an errant or disruptive shareholder.

The document determines the relationship between shareholders and outlines their respective rights and responsibilities.

The agreement typically covers;

  • how and when dividends are paid
  • director appointments and removals
  • decision-making processes
  • the issuing and sale of Shares
  • methods and reasons for termination

It serves as a roadmap for managing shareholder disputes and outlines procedures for removing a shareholder in specific circumstances.

A key feature of a shareholders’ agreement is regulating the relationship between majority and minority shareholders. Majority shareholders have the power to initiate actions due to their majority shareholding. Conversely, in certain instances, minority shareholders can influence company decisions, especially if they hold ‘blocking stakes’ or ‘golden shares’ that prevent certain resolutions from passing.

In Ireland, it’s common to include clauses for ‘tag-along’ and ‘drag-along’ rights.

Tag-along rights protect minority shareholders when majority shareholders sell their stake, offering the opportunity for minority shareholders to join the transaction and sell their minority stake under the same terms. Drag-along rights enable majority shareholders to compel minority shareholders to participate in the company’s sale. This is particularly important where family and friends invest in your business and you want to avoid them having a veto should you wish to sell the entirety of your business.

Notably, a shareholders’ agreement is a private document, unlike the Constitution of a Company which is a public document available from the Companies Registration Office. A shareholder’s agreement therefore allows for the inclusion of confidential information without public access.

Find out more about creating a shareholders agreement template.

Grounds for removing a shareholder

Navigating shareholder relationships can be challenging, especially when dealing with problematic or disruptive shareholders. In such cases, it may be necessary to consider removing them to protect the company’s interests. However, this decision should not be taken lightly and specific grounds for removal exist.

Breach of Shareholders’ Agreement: Violating the terms of the shareholders’ agreement may be grounds for removal as a shareholders. This includes non-compliance, failure to meet responsibilities, or acting against the company’s interests.

Misconduct: Shareholders can be removed for engaging in fraudulent activities, misusing company assets, or harming the company’s reputation.

Failure to meet obligations: Not meeting financial obligations, such as non-payment for shares issued and failure to meet cash calls can be grounds for removal.

Inability to perform duties: Shareholders who are unable to perform their duties due to illness, bankruptcy, incapacity or personal circumstances may be removed.

Conflict of interest: When a shareholder’s personal interests conflict with the company’s best interests, removal may be warranted.

Given the complexities and legal implications involved, seeking professional legal advice before proceeding with shareholder removal is advisable. It’s also important to consider the impact on the company’s image and relationships with other stakeholders such as customers and suppliers.

Contact us here to get advice on your shareholder dispute.

Procedures and steps for removal

Generally, a majority of shareholders, through an ordinary resolution after giving special notice, can remove a company director. However, it is important to note that there is no automatic right for majority shareholders to force a minority shareholder to sell their shares.

  1. Review the Shareholders’ Agreement: Check the terms for removing a shareholder, including share valuation and transfer process. There may be specific clauses in the agreement to allow you to buy your fellow shareholders out.
  2. Legal consultation: Seek advice on implications, potential disputes, and compliance with relevant laws.
  3. Grounds for removal: Clearly document reasons such as breaches, misconduct, or conflicts of interest. Take detailed notes of meetings and various incidences.
  4. Shareholder meeting: Convene a meeting, allowing the shareholder to present their case. Pass a resolution to remove the errant shareholder(s).
  5. Valuation of shares: Determine the shareholder’s stake value, following an agreed or specified valuation method. Remember a minority interest will never be as valuable as a majority stake in the business.
  6. Transfer of shares: Transfer shares to existing shareholders, new investors, or the company itself.
  7. Notification to Companies Registration Office (CRO): Report the dismissal of directors and the company secretary within 15 days using Form B10.
  8. Update company records: Reflect the change in shareholders in the register of shareholders.
  9. Stamp and Sign Stock Transfer Forms: Don’t forget to stamp and register the Stock Transfer Forms.
  10. Other Roles: Don’t forget that if you are negotiating an exit, if an errant shareholder is a director and/or employee of the Company, you need to make sure that they exit these roles as part of the overall exit.

Expert legal counsel is crucial in order to ensure the process is fair and transparent and at the same time as little collateral damage as possible is done to the company and its business.

Implications of removing a shareholder

Legal implications: The removal of a shareholder must comply with the terms outlined in the shareholders’ agreement and applicable laws. Failure to do so could result in legal disputes or penalties. The removed shareholder may also have rights to challenge the decision, which could lead to litigation.

Financial impact: The removal of a shareholder often involves buying back their shares. This could potentially strain the company’s finances depending on the valuation of the shares. It may also impact the company’s financial structure and ownership distribution.

Company dynamics: It can alter the balance of power within the company. Depending on the stake held by the removed shareholder, it may change the decision-making process and influence within the company. It might also affect the relationships between remaining shareholders.

Reputation: The way the removal is handled can impact the company’s reputation. If not managed carefully, it could give rise to negative publicity and damage relations with other stakeholders like clients, suppliers, or potential investors.

Business continuity: Depending on the role and involvement of the shareholder in the company’s operations, their removal could potentially disrupt business continuity. It may necessitate restructuring or reallocation of duties among remaining shareholders or management.

Given these potential implications, it is crucial that the process of removing a shareholder is thoughtfully planned and executed. Legal advice should be sought to navigate the complexities and mitigate risks. The process should be transparent and fair, keeping the best interests of the company at its core.

Safeguarding against future shareholder issues

Here are some strategies to safeguard against potential shareholder disputes:

  1. Comprehensive Shareholders’ Agreement: A well-drafted shareholders’ agreement is the first line of defence. It should clearly define the rights, duties, and obligations of each shareholder, processes for conflict resolution, terms for share valuation, and procedures for the sale or transfer of shares.
  2. Regular Communication: This can help to avoid misunderstandings and build trust among shareholders. This includes keeping shareholders informed about the company’s financial status, strategic decisions, and any changes that could impact their investment.
  3. Dispute Resolution Mechanism: The shareholders’ agreement should include a clear process for resolving disputes, such as mediation or arbitration. This can offer a structured way to handle disagreements without resorting to litigation.
  4. Clear exit strategy: Having a clear exit strategy in a shareholders’ agreement can prevent disputes during transitions. The agreement should outline the terms and conditions under which a shareholder can sell their shares, including first refusal rights and valuation methods.
  5. Active board of directors: An active and engaged board of directors can provide oversight and guidance, helping to prevent conflicts and ensure that the company’s interests are always prioritised.

By implementing these safeguards, companies can minimize the risk of shareholder disputes and ensure smooth operations, contributing to long-term growth and success.

Summary: can you remove disruptive or inactive shareholders?

Removing disruptive or inactive shareholders from a company depends upon the provisions in your shareholders agreement and their rights under the Companies Act.

Very often a shareholder who is inactive or disruptive may allege that they are being oppressed and they may seek to take action under Section 212 of the Companies Act 2014. 

Taking an action under section 212 is open to any member of a company who complains that the affairs of the company are being conducted or the powers of the directors are being exercised “in a manner oppressive to him or her or any of the members (including himself or herself), or in disregard of his or her or their interests as members.”

Article by: Milan Schuster