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Check the shareholders’ agreement before firing a shareholder

On Behalf of | Feb 24, 2022 | Business Litigation

Shareholders should be a benefit to a company, but sometimes one or more may become a detriment through irresponsible or embarrassing actions. The situation may become serious enough that you as a business owner want to remove a particular shareholder. This is not always easy. In fact, it could devolve into litigation against you unless you have strong legal grounds to remove the shareholder.

A shareholders’ agreement should establish the procedures necessary to remove a shareholder from your company. Business.com explains the different aspects of this kind of agreement that may show you how to proceed.

Rights of shareholders

A shareholders’ agreement is a contract that binds all the shareholders. The agreement should address the rights of the shareholders. This may help you understand how to treat a shareholder so he or she does not have recourse to sue you. If the agreement describes removal procedures, it may also contain rights for the shareholder during the removal.

Removal for offenses

If a shareholder has certain obligations per the agreement, violating any specific provisions may serve as grounds to remove the shareholder. There may be fiduciary duties or moral standards that a shareholder has an obligation to uphold. Even a person who owns more than 50% of a company’s shares could face removal for a violation, though it is generally difficult to remove a majority shareholder from a company.

A buyout clause

Many businesses include a buyout agreement in their contracts. Buyout clauses establish a price agreed to in advance for a business to buy out a shareholder’s stake. Your shareholders’ agreement may have set up a way to purchase any shareholder’s share of the business. However, your agreement should explain the triggering events to buy out a shareholder, or the shareholder might object to the sale.

In the event a shareholders’ agreement is vague on how to remove a shareholder, you might try negotiating with the shareholder on a departure. Be aware of your options to legally remove a shareholder so that you do not have to deal with unnecessary litigation.