Removing a Shareholder from a Limited Company

Things change, and there exists the chance that the shareholders in a company might, too. This can be for many reasons: a shareholder may wish to cash-in on their shares for personal reasons or to make alternative investment. On the other hand, there may be a disagreement between one shareholder and the others, with such deadlock requiring the removal of the dissenting party to enable an effective continuation of business relations.

This presents us with two scenarios: the shareholder may leave on voluntary terms, or it could be the case that other shareholders are seeking their departure, which the intended shareholder may refuse. Such is further complicated by the fact that shareholders often take simultaneous roles as directors and/or employees of the company, which itself presents new processes and issues to take consideration of. This will all be addressed below.

Methods for removing a shareholder from a limited company

It is, of course, not possible to simply ‘delete’ shares from a company. As such, removal of a shareholder requires a transfer of the shares they hold.

Transfer of shares

Where a shareholder makes the voluntary decision to leave a company, they may wish to transfer their ownership of limited company shares to one or more other individuals. This can be effected through a gifting or sale of those shares, as achieved via a director’s filling in of a Stock Transfer Form. This form effects an official transfer of ownership of the shares. Do note that you may incur Stamp Duty where the transaction in question is over £1000 (0.5%), and Capital Gains Tax if selling the shares for a profit.

Buying out of minority shares

Where disputes arise with one dissenting shareholder in question, the other shareholders may wish to instigate the removal of that shareholder. One way of doing this is to effectively ‘buy out’ the shareholder. However, the starting point is that there exists no automatic right for majority shareholders to force a sale of the shares of a minority shareholder.

Depending on how well-drafted the Articles of Association, they may contain a provision enabling you to force a minority shareholder to sell. Where no such provision exists, majority shareholders could consider passing a special resolution (which requires 75% or more of votes in favour) to amend the articles and include a provision to this effect. However, you ought to be careful as any such alteration could give rise to a potential claim by minority shareholders for unfair prejudice. Legal advice should therefore be taken if you are considering taking this step.

Where the former options are not possible, you will need to commence negotiations with the exiting shareholder to reach agreement on the purchase of their shares. In these instances, it is important to check if there is a shareholders’ agreement in place, as it may contain a clause providing for the ‘buy-back’ of shares when a shareholder leaves a company. This is sometimes referred to as a ‘bad leaver’ clause. Such clauses can be particularly helpful as they may set out how to determine the value of shares - for example they may state that shares are to be bought back at a ‘fair value’ and contain a calculation to determine fair value.

In the event that relations have turned particularly sour, negotiations, of course, be difficult. In these instances, a carefully constructed offer from lawyers could avoid the need for costly litigation down the line and save considerable time and expense. As such, it is advisable you obtain expert legal advice in these instances.

Voluntary liquidation

An alternative, nuclear option, is that majority shareholders holding at least 75% of the shares in a limited company, which is solvent, wind the company up under a members’ voluntary liquidation. Where this is done, the company’s assets can be transferred over to a new company and the shareholder you wish to remove receives no shares in that new company.

As stated, however, this is a nuclear option. It also may not be a viable option where you have built up considerable good reputation around your current company, which you do not wish to lose or damage.

Death of a shareholder

Typically, a limited company will legislate, or issue guidance for, the arrangements on the death of a shareholder, with shares being transferred to a named beneficiary within the company or distributed about amongst existing shareholders. In some instances, the named beneficiary might be a personal relation who the shareholder has stipulated in their will, should the articles/any shareholders agreement all for this. Irrespective of the route taken, any transfer will be made effective by a company director’s filling out of a Stock Transfer Form.

Removing a shareholder who is also a director and/or employee

It should be borne in mind that, very often, directors and shareholders fulfil the same roles. Therefore, where you are looking to remove a shareholder, you are also likely to be looking to remove the same person from their position as director (and vice versa).

There are different procedures to follow to remove a person from their position as shareholder, director and employee, both/all of which must be followed for compete removal of the individual in question.

However, in some ways, removing someone from their position as a director is easier than removing a shareholder. This is because the Companies Act contains specific provision for the removal of directors. Under the Act, shareholders can remove a director by passing an ordinary resolution (requiring more than 50% of votes in favour), provided that special notice was given of the proposed resolution.

It is important in instances where the shareholder is also an employee, to be aware of the potential for an unfair dismissal claim. It is therefore advisable that you seek professional legal advice for these purposes.

Updating the register and notifying Companies House

As a statutory requirement, changes to the shareholding of a company ought to updated on the register of members, which must be available for public inspection at all times. This duty falls on a company director. Alongside this, these changes must also be communicated to Companies House, which can be done the annual confirmation statement.