Where the relationship with a shareholder becomes a company problem, it needs to be carefully handled or it could developIe into a much greater and more expensive issue for the company.
Issues can arise when a shareholder believes the company is going in a direction the shareholder does not approve of or never agreed to when they invested in the company. This normally applies to minority shareholders. The shareholder might discuss their problem with other shareholders and this can create a group or class of shareholders that is opposing the company business. Alternatively, they might act alone and become disruptive. This is more fraught for the company where the disgruntled shareholder is also a director.
Apart from having to deal with a shareholder grievance, there is a good deal of executive time wasted on this internal dispute. So, it is very important for the company to ensure the proper steps are taken in dealing with the issue as quickly as possible and, towards this end, discussing the problem with the company solicitor is recommended.
Minority shareholders have rights enshrined in legislation, so it is of utmost importance that these rights are not violated. Such rows can get personal among
individuals who know each other and this can become very damaging for all concerned. It is important that any of the board members do not step over the line in dealing with the disgruntled shareholder.
If the disgruntled shareholder becomes such a problem that it is interfering with the business of the company, then the board can take steps to remove the shareholder from the register of shareholders.
Firstly, consult the Shareholders Agreement which all shareholders have signed up to and within that, there may be a clause that addresses the situation that has arisen.
It is very important that in dealing with the unhappy shareholder that in whatever action is taken by the company, the Shareholder's Agreement is followed.
Removing a Shareholder
Having consulted the Shareholder’s Agreement and taken advice from your solicitor, the Board of Directors may well decide to remove the shareholder.
If, having reviewed the Shareholder’s Agreement there is evidence that the shareholder is in breach of the Agreement, then this can justify the shareholder’s
removal. This, however, requires a high threshold because if the breach were minor, the shareholder could mount legal action against the company. Minor breaches can be dealt with internally and may not warrant the shareholder’s removal. Here your solicitor’s recommendation should be followed.
If the shareholder misrepresented the company, engaged in fraudulent activities, misused company’s assets, etc. these actions in themselves would justify the
removal of the shareholder. Other instances that would justify removal would be insider dealing, failure to perform specific duties, conflict of interest.
Once the decision has been made to remove the shareholder, the board then must put in place the procedures for this.
The company should do this in conjunction with their solicitor to ensure no error is made which could leave the company exposed to legal action by shareholders or their representatives.
The company should write to the shareholder citing the Shareholder’s Agreement and setting out clearly the reasons why the Board feel that it is in the
best interest of the company that the shareholder be removed from the register of shareholders.
The letter should invite the shareholder to a meeting to enable them to state their case or defend their position. At the conclusion of the meeting, unless the
Shareholder has persuaded the company not to remove the shareholder, the company should pass a resolution for the removal to proceed.
The value of the company needs to be agreed so that a value on the shares can be achieved. There is a school of thought that a majority is more valuable than a minority shareholding. This may be so in many cases but where a minority shareholders hold the balance of control; it is arguably that the minority shareholder is at least equal to and possibly more valuable than any other shareholders.
After the shareholder has been removed, make sure the proper documentation has been done, i.e., transfer of shares; notification to the Companies Registration Office, stamp and sign the stock transfer forms.
Most importantly: do not remove a shareholder without the guidance of your solicitor.
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