Removing Unwanted Minority Shareholders

Shareholder disputes are often categorised as David and Goliath battles with the oppressed minority in the role of David. However I have come across a number of scenarios recently where the majority shareholders have been desperate to rid themselves of a disruptive minority.

The best protection is normally a well drafted Shareholders Agreement, or some suitably amended memorandum and articles of association, but all too often in the glow of the initial venture trust and confidence mean that this has been deemed unnecessary.

In all cases the starting point must be to negotiate first. The resolution to shareholders disputes is almost always an order that one party, normally the majority, buy out the other, the minority, for value. Therefore the expectation should always be that you will have to pay a fair value, without a minority discount, for the shares.

What therefore can the majority do positively to remove a minority? Unfortunately not a great deal, without some imaginative thinking. The majority cannot bring a claim for unfair prejudice to force the issue.

Preferably the minority would commence unfair prejudice proceedings and you could agree to buy him out. Client’s often suggest taking action which would be deemed unfairly prejudicial to seek to precipitate such a claim. Generally I advise against this as deliberately embarking on blameworthy conduct can have unforeseen consequences and seriously escalate the costs and disruption to the business.

What do you do then if the minority refuses to negotiate and does nothing?

As a first step it is advisable to send the other party an O’Neil v Phillips letter. This is an offer to buy the shareholding on the terms most likely to be awarded by the court. This will put the shareholder at risk of costs if he refuses to negotiate and takes his own proceedings. It is a very useful tool to commence negotiations but the minority cannot be required to sell his shares. Therefore how might you force an unwanted minority shareholder out of a business?

If the shareholder has less than 25% of the shares you could wind up the company. This seems drastic but if the company is wound up solvently through a members voluntary liquidation (MVL) the company’s assets can be transferred from oldco to a reconstituted newco, which excludes the minority. This is only possible where the minority has less than 25% of the shares as a special resolution is required to affect the MVL.

If there is any prospect that the company is insolvent then it may be possible to put the company into an insolvency procedure and transfer the assets to a reconstituted newco, this however is considerably more problematic than the MVL route as there can be no guarantees that you will purchase the business and it will crystallise an investigation of oldco’s affairs and the conduct of the directors. This may however be possible where a party has more than 25% of the shares, or is even a majority shareholder.

There is a distinct lack of remedies for a majority shareholder who wishes to remove a minority and where simply allowing him to remain and draw a dividend is deemed unacceptable. These solutions may be disruptive and expensive so the legality, costs and benefits must be carefully considered.

If you wish to discuss this case, or any other matter, please call Gary Player on 01403 711869.

This information is provided to highlight general issues only and is not intended as specific advice. Players Solicitors accepts no responsibility whatsoever if you chose to act on the matters stated herein without taking specific advice.

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