Removing a Shareholder: Everything You Need to Know">

Removing a shareholder from a corporation is a very involved process. Hopefully, your shareholders agreement will have a procedure for removing a shareholder.3 min read

Removing a shareholder from a corporation is a very involved process. Hopefully, your shareholders agreement will have a procedure for removing a shareholder. Typically, removing a company shareholder requires a majority vote of your other shareholders.

Refer to Your Shareholders Agreement

Checking your shareholders agreement should be the first step you take if you need to remove a shareholder. Depending on your specific agreement, there may be a set procedure for shareholder removal. The purpose of a shareholders agreement is to define the duties and rights of shareholders in a corporation.

A shareholders agreement guarantees fair treatment of all shareholders and ensures that every shareholder knows their power and responsibilities within the company. A properly written agreement will make it easier to remove a shareholder later on.

Basically, a shareholders agreement functions as a contract that tells shareholders what they can and cannot do within the company. For instance, if your company's agreement includes rules of conduct, you should be able to easily remove a shareholder who repeatedly violates these rules.

Removing a majority shareholder, or one who owns over half of the company's shares, for violating conduct rules is easier than removing them on other grounds. If a majority shareholder breaks a rule that is specifically outlined in the agreement, you shouldn't have any trouble removing them from the company.

When writing your shareholders agreement, it's crucial that you include detailed information about your company:

1. A capitalization table
2. How many shares you will issue
3. Rules for share transfers
4. If shareholders have preemptive rights to purchase company shares
5. How shareholders will get paid if the company is sold

Including the right details in your agreement will make it easier to remove a shareholder in the future.

Help From an Attorney

If you read your shareholders agreement and find that there is no protocol for removing a shareholder, there are a few ways that you can proceed.

First, check the corporate statute in your state. If your shareholders agreement does not specify how to remove a shareholder, the rules of the corporate statute will apply. Every state has its own laws for corporations and how they can remove shareholders.