As a Texas business owner or majority shareholder in a closely-held corporation or limited liability company (LLC), shareholder control is something that’s probably on your mind.
Minority shareholders are often great allies to your business. Sometimes, though, they can be disruptive and prevent management from achieving the business’s strategic goals.
A question we get asked from time to time at The Curley Law Firm is, Can a majority shareholder remove a minority shareholder? We’ve prepared this brief guide to help Texas businesses like yours address how to remove a minority shareholder.
Common Options for Removing a Minority Shareholder
The most common options for removing a minority shareholder include buying them out or asking them to sell their shares. Regardless of which of these two common options you choose, you should consult your company’s shareholder agreements and bylaws first.
Often, these documents will tell you what process to follow. They may also indicate if you have any other options. An experienced Texas business lawyer can help you navigate this process. The Curley Law Firm has over a decade of experience helping Texas businesses with shareholder issues.
Consulting Your Company’s Governance Documents
If your organizational documents (like your bylaws and shareholder agreements) have information about how to remove a minority shareholder, then you’re in luck!
Following the process laid out in your shareholder agreements is typically a solid course of action. When your minority shareholder bought shares in your company, they agreed to this same process.
Unfortunately, these same documents may restrict your own rights. Consulting a Texas business lawyer is one of the most important things you can do as you analyze your governance materials.
An experienced corporate lawyer can help you understand your rights as a majority shareholder. They can also help you plan your next steps.
Buying Out Minority Shareholders
If your shareholder’s agreement or other governance document doesn’t give you a roadmap on how to remove a minority shareholder, then you can negotiate how to buy out minority shareholders. Typically, the shares in a closely-held corporation or LLC will be sold at a discount to the share price.
However, when strategizing how to force out a minority shareholder, you’ll need to make a reasonable offer for the shares. Otherwise, the shareholder may refuse the offer to sell.
It may explain why they have become an irritant in the first place. Sometimes, issues with minority shareholders are not about money. Rather, their issue is with control over the company or perks associated with being a shareholder.
If the problem with your minority shareholders is the latter, you may need to remove the minority shareholder’s non-monetary reasons for retaining their shares. For instance, if all shareholders currently receive access to certain perks because of shareholder status, consider limiting that to majority shareholders only.
Understanding Minority Shareholder Oppression
Texas law (and other laws) prohibit something called minority shareholder oppression. This means you cannot unlawfully suppress minority shareholders’ rights.
To make sure you’re not engaged in behavior likely to be seen as oppression, you may want to consult with a Texas business law attorney. If the minority believes you are oppressing them, they can take you to court to pursue equitable remedies. In fact, even a non-shareholder can sue for minority shareholder oppression!
That said, with a reasonable offer in hand and non-monetary benefits removed, minority shareholders may become more willing to part with their shares.
Avoiding Minority Shareholder Oppression
Only certain actions are typically seen as minority shareholder oppression. You will likely be able to restrict certain perks from minority shareholders without issue. But you should be aware of the issues you might encounter. In general, you should avoid:
- Withholding shareholder information;
- Refusing to issue dividends to minority shareholders;
- Violating minority shareholders’ rights under any governance documents; and
- Acting in ways contrary to your shareholder agreement.
If your actions follow the rule that the major financial benefits of the corporation are for all shareholders, you shouldn’t have to worry. Regardless, be sure to speak with an experienced Texas corporate attorney if you have any questions.
Encouraging the Minority Shareholder to Sell Their Shares
If a minority shareholder doesn’t accept a buyout offer, then you may need to find ways to encourage them to accept. Sometimes, this means increasing your monetary offer for the shares. Other times, it may mean terminating the minority shareholder’s employment or contract if they are an employee or a vendor.
It may also mean lawfully blocking the minority shareholder’s attempts to have a say in the company’s management. Once the incentive of employment or control is removed, minority shareholders are often more than willing to sell.