Change in Business

Procedure for Removal of Shareholders

Removal of a shareholder from a company is a very lengthy process. A company must enter into an agreement with the shareholders. The agreement must include the shareholder removal process, i.e. shareholders agreement shall have a procedure for removing a shareholder. Typically, removing a company shareholder requires a majority vote of other shareholders of the company.

What are the key criteria that are required for the removal of the shareholder?

Removal of the shareholder

For the removal of a shareholder, a company requires Shareholders agreement that shall be considered as a first step. Company requires. A set of procedures for shareholder removal is required, which may vary from agreement to agreement. The objective of a shareholder’s agreement is to define the duties and rights of shareholders in a company.

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

The shareholder agreement of the Company defines the activities that tell the shareholders what they can and cannot do within the company. For Example, if the company’s shareholder agreement includes a Code of conduct, it will be easy for a company to remove a shareholder who constantly violates these rules.

In case of violation of code of conduct, i.e. breaking a rule that is specifically outlined in the agreement, it is easier for a company to remove a majority shareholder or the shareholders who own over half of the company’s shares, rather than removing them on other grounds.

While writing a shareholder’s agreement, it is important to keep a piece of detailed information about your company:

1. A Financing Chart
2. How many shares a company will issue
3. Procedure for share transfers
4. The Procedure, where to purchase company shares shareholders have preemptive rights
5. If the company is Winding up or has been acquired, how shareholders will get paid by the company?

Note- In case if the shareholder’s agreement does not describe how to remove a shareholder, the rules of the corporate statute will apply. Every state has its own laws for the company and how they can remove shareholders.

Types of Removal of Shareholder-

1. Voluntary vs Involuntary Removals –

Before removing a shareholder, Firstly, it is required to know whether the shareholder is leaving the company voluntarily or involuntarily.

Voluntary removal of a shareholder is a simple process, as the shareholder himself/herself wants to remove his/her name as a shareholder of the company.

In the case of involuntary removals, the shareholders have violated the shareholder’s agreement or company bylaws before they can be ejected out of the company.

2. Resolution-

Passing Shareholder’ removal resolution shall be the next step after the shareholder’s agreement. After drafting the resolution, a company shall present to the Board of Directors the draft of the Resolution.

The resolution must contain-

• The resolution must include the correct information.
• The reason for removing the shareholder
• In case of violation of laws and by rules, the resolution must include the reason for removing the shareholder.

The shareholder’s agreement must describe the process of involuntary removal. Otherwise, a company cannot force out a shareholder until they have violated the Company statute. Once the resolution is passed the Company Secretary and Board of directors should sign the removal resolution.

In case of where a company does not have a shareholder’s agreement, or if the shareholder to be removed hasn’t violated company rules, the resolution must pass by a 3/4^th majority vote.

Under what circumstances, a Company can remove the shareholder?

A company can remove the shareholder under the below-mentioned circumstances-

1. Shareholder’s Dispute-When a situation arises where the director is in dispute with a Shareholder which ultimately results in wanting to remove the shareholder. However, forcing the shareholder to quiet the shares is a very difficult thing to implement, and the shareholder has the right to retain the shares.

2. Transfer of shares-Transfer of shares results in the removal of the existing shareholder from the register of member and adding a new shareholder in the shareholder’s list by issuing a Share certificate. The new shareholder in place of the existing shareholder will then pay the full value of the Purchase price.

3.Shareholder’s Death– A circumstance where a shareholder dies, the shares can be transferred on to a named beneficiary whose name is mentioned as a Nominee or Beneficiary. If this happens, the company director follows the procedure of transfer form in order to hand over the shares to the respective person. However, If the Articles of the Company does not permit and prohibit share transfers to non-members, the process may not be allowed.

However, the shareholder agreement of the Company specifies what should happen in the case of the death of a shareholder. Usually, it involves a process of transmitting the shares to the beneficiary, or an agreement to make the shares available for purchase by existing shareholders.

Intimation of Removal of shareholders to the Authority-In case of any change occurs in the shareholding pattern of the Company. The Company is required to intimate it to the ROC.

Can a Majority Shareholder remove the Minority shareholder?

Removing the Minority shareholder by a Majority shareholder is the simplest if a shareholder’s agreement is well draft. The Majority shareholder can simply buy out a minority shareholding at a predetermined price. However, in case of the absence of a Shareholder agreement, it is difficult to force the minority shareholder to sell their stake.

Conclusion-In case of the removal of the shareholder the proper details of the Individual /Company along with the date of change taking effect, class of shares and the number of shares being removed must be intimated to the respective authority.

Also, Read: Share Certificate Requirement and Procedure to Issue – The Ultimate Guide