Confusion often arises around the different roles within a company, particularly between directors and shareholders. When disputes occur, it’s common for people to ask whether a director has the power to remove a shareholder from the company.
In most cases, the answer is no. Directors manage the day-to-day affairs of a company, but they don’t usually have the authority to remove someone’s ownership interest. Understanding this distinction is essential when dealing with shareholder disputes.
In this article, we explore whether a director can remove a shareholder, how shareholders can lose their shares in certain circumstances and what legal options may be available. We also explain how to arrange a free 30-minute consultation with a dispute resolution solicitor to discuss your situation.
Can a director legally remove a shareholder?
As a general rule, a director can’t remove a shareholder from a company. Shareholders are owners of the business and their rights are separate from the management role carried out by directors.
A director’s powers are limited to those set out in company law, the company’s articles of association and any shareholder agreements. These powers usually relate to running the company, not altering ownership.
Removing a shareholder typically requires either the shareholder’s agreement, a contractual mechanism or a court order. A director acting alone doesn’t have the authority to force a shareholder out simply because of a disagreement or breakdown in relations.
How can a shareholder lose their shares?
Although directors can’t usually remove shareholders directly, there are circumstances in which a shareholder may be required to give up their shares.
This can happen where the shareholder agrees to sell or transfer their shares, where the company buys back the shares in accordance with the law or where compulsory transfer provisions apply under the company’s governing documents.
In more serious disputes, the court may order a shareholder’s shares to be bought out as part of a legal remedy, particularly in unfair prejudice cases.
The role of the articles of association
A company’s articles of association play a crucial role in determining how shares can be transferred or removed. Some articles include compulsory transfer provisions that are triggered by specific events.
These trigger events may include misconduct, insolvency, ceasing to be an employee or director or breaches of the shareholder agreement. However, these provisions must be applied strictly and fairly to be enforceable.
Understanding what the articles say is an essential first step before taking any action involving shareholder removal.
Shareholder agreements and forced removal
In addition to the articles of association, shareholder agreements often set out circumstances in which a shareholder may be required to sell their shares. These provisions are contractual and can be enforced if they’re properly drafted and followed.
Common examples include leaver clauses, deadlock provisions or situations where a shareholder breaches the agreement. These clauses usually include rules on how shares are valued and how the transfer must take place.
If a shareholder agreement exists, it’s critical to follow its terms precisely. Failure to do so can result in breach of contract claims and further shareholder disputes.
What if the director is also a majority shareholder?
Matters become more complex where the director seeking to remove a shareholder also holds a majority of the shares. In this situation, it’s important to distinguish between actions taken in the director’s role and actions taken as a shareholder.
While majority shareholders may have voting power to approve certain transactions, they must still act lawfully and in accordance with company law and any agreements in place. Using control to force out a minority shareholder unfairly can give rise to an unfair prejudice claim.
Courts closely scrutinise situations where power is exercised in a way that harms minority interests.
Court involvement and legal remedies
Where disputes can’t be resolved internally, court intervention may be required. Minority shareholders may apply to the court for relief if the company’s affairs are being conducted in an unfairly prejudicial manner.
In these cases, the court has wide powers. This can include ordering the majority to buy out the minority’s shares at a fair value or regulating how the company is run going forward.
In rare cases, a court may also consider winding up the company on just and equitable grounds, although this is usually a last resort.
Common misconceptions and mistakes
Shareholder disputes can be complex and high risk. Removing or attempting to remove a shareholder without proper authority can result in serious legal and financial consequences.
A common misconception is that directors have the authority to remove shareholders simply because they manage the company. Acting on this assumption can quickly escalate a dispute and expose the business to legal risk.
Another frequent mistake is failing to review the articles and shareholder agreements before taking action. Overlooking contractual protections can lead to costly litigation.
Understanding the legal framework before acting is essential.
Speak to a dispute resolution solicitor about shareholder disputes
If you’re involved in a dispute over share ownership or control of a company, professional advice can help you understand your rights and protect your position.
A dispute resolution solicitor can assess your position, explain your options and help you pursue a lawful and strategic resolution, whether through negotiation or court proceedings.
Please note that this article is solely for informational purposes. It’s not a substitute for legal advice. We encourage readers to contact Osbourne Pinner for case specific guidance.
We offer a free 30-minute consultation to discuss your situation. You can speak with us via video call or visit our offices in Harrow, Canary Wharf, Piccadilly Circus or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below.
