When you are working in a business with a partner or other directors, it is likely that from time to time there will be disagreements and some degree of conflict. It is an accepted part of commercial life and most businesses will experience it at some time or other. However, in some instances, disputes between shareholders have the potential to escalate and cause long-term damage to business success. When these disagreements lead the company towards the brink of insolvency, it is clear that some form of action will need to be taken. In this article, how to remove a 50% shareholder, we take a look at the options open to you and the mechanism involved.
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What are the implications of 50:50% ownership?
When a business started by two people is incorporated into a company, the founders often split the shares 50:50. This is because the beginning of a new business is filled with optimism and a sense that the future will be full of excitement and success. With both parties feeling they will contribute to the business in their own defined way, an equal split of the shares seems like a reasonable thing to do. Unfortunately, a 50:50 split does present certain problems concerning control of the business and this will often present itself when there is friction between the parties or disagreement.
Under company law, certain decisions can only be made by shareholders who hold over 50% of the shares. Shareholders with 51% of the equity have the power to appoint and remove directors (and thus change day to day control) and to approve payment of a final dividend. Additionally, if your co-shareholder has over 25% of the shares, he or she may block any special resolution, such as one to change the articles of association of the company. Consequently, if you want full control, you need over 50% of the shares and your fellow shareholders should have under 25% (either individually, or ideally, between them).
Removal of a director
Ordinarily, it is not difficult to remove a director, however, to do so you must own over 50 per cent of the votes of the shareholders. This will prove problematic if you hold the shares 50/50 and your partner disagrees.
If you can control over 50 per cent of the vote then you are obliged to provide special notice before passing the resolution to remove the director. This is 28 days.
Just consideration should be given to any director’s loans made by your partner director to the company. Unless agreed otherwise, a loan made to the company by a director is repayable in full on demand. In commencing the removal of your partner, you may unwittingly find yourself having to repay substantial loans. This may be a bitter pill to swallow, not to mention a costly blow for the company.
Further consideration should be had to any assets or documents that the director may have in their possession. This includes confidential information, trade secrets, client lists, intellectual property as well as credit cards, keys, company cars or other physical company property. If you are in the process of removing the director you may want to notify the bank that they should be removed from the mandate.
If you have a well-written shareholders agreement in place, these issues will be set out with a proposed method for dealing with them. Often, when shareholding is linked to management/directorship in the company, there will be a clause forcing a transfer of shares from the outgoing director, which can simplify matters greatly.
What to do if there is no shareholders agreement in place
Without a shareholders’ agreement in place which addresses the return of an outgoing director’s shareholding, it can prove to be difficult to remove a shareholder. This is especially the case where shares are held 50/50. Most decisions for shareholders require over 50% of the votes. If this is not reached and such a situation is not properly addressed in a shareholders’ agreement, deadlock arises and the company cannot function. In the absence of the proper mechanisms in place, the recovery of shares and resolution of deadlock will be a matter for negotiation. If this fails, then court action may follow and/or the company may be dissolved.
The roles of shareholder and directors are often confused. As a shareholder only, you hold equity in the company and, unless agreed otherwise, you will not have responsibilities for the management of the company. You will, however, have specific shareholder rights, including the right not to be unfairly prejudiced. This does work both ways. As a result, there is a risk of an action being commenced by your business partner if you seek to affect his role within the business but equally, you could say that you are prejudiced by him continuing.
A shareholders’ agreement and directors service level agreement is vital to govern the relationship with your co-founders. Having these documents in place will form the basis of your relationship with your fellow shareholders and set out and manage expectations between the parties.
Also, when it comes to the question of investment or sale, any prospective investor or purchaser will need to see that all these issues have been handled correctly.
How we can help
We have a proven track record of helping clients with shareholder disputes. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact our Litigation Solicitors
It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of saving you money and ensuring you achieve a positive outcome.
To speak to our Litigation solicitors today, simply call us on0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form.We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Authored by Ben Posted in Litigation, News Tagged as
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