Removing a Shareholder from a Business or Corporation
April 18, 2023
Sometimes in the operation of a business, a shareholder may become an obstacle to achieving the goals of the corporation or company or may stand in the way of decisions that need to be made for the benefit of the entity.
There are legal means to remove a shareholder, and the method to do so depends on both the bylaws of the business entity and the firm’s shareholders’ agreement. If there is no shareholders’ agreement, involuntary removal is still possible but more difficult.
If the shareholder to be removed is a board member, California Corporations Code Sections 300 to 318 does permit a removal “without cause,” provided the votes for removal outnumber the “no” votes when the number of “no” votes would be sufficient to elect that person to the board.
A director may not, according to the Code, “be removed if the votes cast against removal of the director, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively….”
If you’re seeking to remove a shareholder in a company, or the company is trying to remove you, in or around San Francisco, California, contact the Law Offices of David H. Schwartz, INC. for reliable legal assistance. Business litigation Attorney David Schwartz has more than 45 years of experience in handling business disputes involving shareholders and can assess the situation and advise you of your best options going forward.
The Law Offices of David H. Schwartz, INC. proudly serves clients in San Francisco, San Jose, Santa Clara, San Mateo, and throughout Alameda County, California.
Why Might a Shareholder Depart a Business or Corporation?
A shareholder may have a variety of reasons for moving on from a company. Retirement and/or health issues may come up. The person may no longer want involvement and is looking for new challenges. If it’s a publicly traded company, the shareholder can unload their shares on the stock exchange. If it’s privately held, then hopefully the articles of incorporation or association contain a buy-sell provision.
Of course, there can also be instances when the company wants to force a shareholder out – an involuntary removal. This can be for a number of reasons, and it is legally possible to force an involuntary removal depending on whether there is or is not a shareholders’ agreement binding all those who hold shares to certain measures of conduct. If a shareholder violates one of the principles in the agreement, or perhaps in the bylaws as a director, then certain steps can be taken for removal.
Steps in Removal Under a Shareholders’ Agreement
First, the shareholder must have violated either the shareholders’ agreement or the bylaws (or both), and a resolution for removal has to be drawn up and presented to the Board of Directors. The cause for the removal must be stated, and a buy-out request to gain back the shares can also be included. The resolution is then subject to a vote by the Board of Directors. If passed, it must be signed by the Corporate Secretary.
Even with a “yes” vote, negotiations may still need to be held regarding purchasing back the shares if there is no precise procedure in the shareholders’ agreement. As part of an involuntary termination, it is also advised to include a non-compete agreement that the removed shareholder must adhere to. In California, however, non-competes are almost always invalid unless they involve a former owner of the company, which a shareholder could be considered to have been in some cases.
If There Is No Shareholders’ Agreement
In the absence of a shareholders’ agreement, removing someone gets tougher. It takes a 75 percent vote of the Board, and the shareholder being removed must own less than 25 percent of the company’s shares.
Why Consult a Business Litigation Attorney?
Removing a shareholder involuntarily can be challenging, even if the shareholders’ agreement spells out everything clearly. Before removing anyone, you should check with an experienced business litigation attorney to ensure you’re on solid footing and are prepared for any challenges or unanticipated circumstances. You should also have your bylaws and shareholders’ agreement reviewed to see that they meet all legal standards going forward.
Skilled Business Advocacy
For all shareholder issues, questions, and concerns, whether you’re just forming your business entity or down the line, once an involuntary removal looms, consult with the business litigation attorney at the Law Offices of David H. Schwartz, INC. for dependable legal guidance.
Attorney David Schwartz represents clients on both sides of the removal process in and around the Greater San Francisco Bay Area. Reach out immediately if you’re looking to remove someone or if you’re the subject of removal and want to assert your rights.