A shareholder of a limited company can choose to leave that company whenever they wish and for whatever reason; this may be down to a desire to re-invest their money in a different business or because they no longer wish to be associated with that company. A shareholder may also be removed in the event of their death. Whatever the reason, their shareholding must be re-allocated, by either sale or transfer.
In these circumstances, removal of the shareholder is generally straightforward.
What is more complicated is when a company wishes to remove a shareholder following a dispute between the shareholders. Although this is quite a common occurrence, the consequences of dealing with such fall-out can be anything but straightforward, and the company must be mindful of the shareholder’s rights.
in this guide, we examine some of the options to remove a shareholder from a limited company.
When can a shareholder be removed from a limited company?
A shareholder can leave a limited company by choice, or through death, or be removed following a shareholder dispute.
Share transfer
If a shareholder chooses to leave, their shareholding can be sold or gifted, and thereby transferred to a new shareholder, quite simply. The company director needs to complete a Stock Transfer form and issue a new share certificate to the new shareholder, following their payment of the purchase price to the exiting shareholder if applicable. If the transaction is over £1,000, 0.5% Stamp Duty will be payable.
Death of a shareholder
If a shareholder dies, their shareholding can be passed to a beneficiary named in their will. Again, the company director needs to complete a Stock Transfer Form and issue a share certificate to transfer the shares. This situation can be a little more complicated than a sale of shares, as often a company’s Articles of Association contains restrictions on share transfers to non-members; the accompanying shareholders’ agreement may make provision for what happens in the event of the death of a shareholder and may specify a named beneficiary or that the shares should be sold to existing shareholders.
Shareholder disputes
This is the most complicated scenario, as a shareholder is under no obligation to give up their shares in the event of a dispute. Therefore, it is advisable that a company prepares for this situation by outlining a departure procedure in the shareholders’ agreement in case of a dispute.
How to remove a shareholder
Depending on the circumstances, the options to remove a shareholder could include:
1. Negotiation
Trying to avoid further conflict and negotiating a solution to the problem should be the first option. It may be that the shareholder is in fact willing to sell their shareholding without issue. It is wise to seek advice from an accountant as to what a ‘fair value’ would be to ensure all parties are happy with the outcome. It is also worth bearing in mind that a minority shareholding will often be valued at a price lower than the shares are worth based on a percentage of the whole.
2. Check the Articles of Association and shareholders’ agreement
The Articles of Association and any shareholders’ agreement should be carefully checked to see if there are any provisions in relation to the exit of a shareholder. ‘Leaver’ provisions may dictate that a company can buy-back a minority shareholder’s shares and state how the leaver can exit the company. Such provisions may also contain a formula for valuing the shareholding. If there are no leaver provisions, there may be a ‘drag along’ clause enabling the majority of the shareholders to force a sale of the minority holding as part of a company buy-out. Well-drafted Articles are always a good idea at incorporation of a company to prevent any ambiguity down the line.
3. Amendment of the Articles of Association
If there are neither of these clauses, the shareholders might want to consider an amendment to the Articles of Association to include these provisions. Such amendment can only be made if the remaining shareholders hold at least 75% of the company shares. If they do, they can pass a special resolution allowing for an amendment. Legal advice should be sought here to prevent the minority shareholder bringing a claim for unfair prejudice if the amendment is construed as oppressive.
4. Wind up the company under a voluntary liquidation
If other options fail, a last resort would be to wind up the company, if solvent, under a members’ voluntary liquidation. Again, a 75% majority shareholding would be needed by the remaining shareholders to enforce this. A new company could then be set up, with the assets being transferred to it and new shareholdings issued, excluding the minority shareholder. This is an effective, if not lengthy and rather aggressive, option but it runs the risk of reputational damage to the company and therefore should be given careful consideration.
5. Non-payment of dividends
It is often the case in small and medium-sized companies where there are a small number of directors and shareholders, that some take on the role of both director and shareholder. In this case, it will be necessary to remove a person as both director and shareholder. (See below for removal of a director). Once removed as a director, the shareholders could increase of the salary of the remaining directors and decrease the amount paid out in dividends. This would remove the incentive for the shareholder to stay on in the company and ensures they are not being rewarded when they are no longer involved in the running of the company.
Removal of a director
Directors typically have a role in the management and day-to-day running of the company, therefore removing them in this capacity is not always easy. The starting point would again be to look at the Articles of Association and any shareholders’ agreement to see if they contain any provisions about the removal of directors and whether they have a contractual right to be on the board. A specific process may be provided for in the documents which should be carefully followed.
If there are no removal provisions and the director is unwilling to resign, the shareholders can resort to the statutory procedure under sections 168 and 169 of the Companies Act 2006, which allows shareholders to remove a director from office. As this is a statutory procedure, it overrides the Articles of Association and any service contract. This legislation provides that a shareholders’ general meeting must be called in which an ordinary resolution should be passed approving the removal of the director. The director should be given special notice of this meeting (of at least 28 days) and the opportunity to put their case forward in person or in writing. The specific timeframes should be adhered to.
Occasionally however, the Articles of Association and shareholders’ agreement may contain provisions limiting the efficacy of this statutory procedure. These may apply particularly when the director is also a shareholder. Such restrictions may include:
- Weighted voting rights (known as a Bushell v Faith clause) for certain shareholders on some resolutions which may prevent a majority vote and therefore enables the removal of the director to be blocked
- Reserved matters (which might include the removal of a director) which require the consent of a certain percentage of the shareholder votes, again preventing the necessary majority being reached
- Quorum requirements for general meetings where attendance by the director being sought to be removed is needed
- A shareholders’ agreement may stipulate that the parties will keep each other on as directors and not use their powers to remove each other
- A removal might give rise to a claim for unfair prejudice
It is important to remember that a director may also be an employee of the business and therefore their employment contract must be terminated lawfully as well. This needs to be done in accordance with UK employment law to prevent a claim for unfair dismissal being brought against the company if they have been in employment for over two years. A service contract may also allow for other compensation to be payable to the director if they are removed. The amount payable may dissuade the shareholders from pursuing a removal.
Once removed as director and employee, they can then be removed as a shareholder. Until then, they still have voting rights and the right to receive dividends.
Practicalities of making changes to a limited company
Making changes to a limited company is done by resolutions being passed by the directors and shareholders to demonstrate their consent to such changes by way of a vote. A resolution must be passed for certain matters, including changing the Articles of Association, changing the company’s share structure, and removing a director. Most of these will be way of an ordinary resolution, which is a simple majority, which can be carried out by a show of hands at a meeting, but others, which includes an amendment to the Articles of Association, will need a special resolution which is a 75% majority. Occasionally, an extraordinary resolution will be needed which is a 95% majority. The Articles themselves will usually dictate which resolution is needed for which issue. It is not always necessary to hold a meeting to pass a resolution; if there is enough consent, a resolution can also be passed in writing.
Shareholders should be given notice when there is to be a vote on a resolution, and they should also be informed of the outcome of a resolution once passed. Special notice of at least 28 clear days should be given to remove a director.
Once a resolution has been passed to remove a shareholder, the company is liable for ensuring that the register of members is updated, and Companies House is notified. The register will record the date the shareholder became a member of the company and the date they departed. The register is open to public inspection and is usually kept at the company’s registered office. Notification of these details should be given to Companies House in the annual confirmation statement. It is the company’s legal duty to ensure this is done. Special and extraordinary resolutions should be filed at Companies House within 15 days of them being passed.
Legal risks
If a company has not had the foresight to ensure that there are clear and comprehensive provisions within the Articles of Association and shareholders’ agreement about the exit of a shareholder, and a dispute does subsequently arise, the provisions of the Companies Act 2006 will have to be relied upon as a solution to the issues.
Under this legislation, a shareholder can claim in certain circumstances that they have been unfairly prejudiced by the conduct of the other shareholders by bringing an unfair prejudice claim to court. A shareholder who has been excluded from the day-to-day management of the company when they had a legitimate expectation to be included can bring such a claim. Such conduct could include a refusal to pay the shareholder dividends, or their removal as a director or employee of the business.
If a court agrees that such conduct was unfairly prejudicial, it can order the company to carry out a certain action or it can order that the majority shareholders buy the minority shareholder’s shares at a price determined by the court or even that the majority should sell their shares to the minority shareholder. This is a real risk, not to mention the cost and time involved in defending such a claim. It is also important to note that company funds cannot be used to defend an action brought by a shareholder.
Although the court’s approach is an objective one, it’s worth remembering that taking preventative action is always better than curative.
It is, in fact, a fairly common occurrence that company disputes arise, and directors and shareholders fall out. It is therefore wise to pre-empt this situation by making clear provision in the Articles of Association and shareholders’ agreement on incorporation of the company for the exit of a shareholder in these circumstances.
If, however, such provision has not been made, legal advice should be sought if a dispute arises, so the exit of a shareholder can be executed as amicably as possible and on terms that suit all parties. Most disputes will be settled out of court.
Removing a shareholder from a limited company FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
