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Can a shareholders’ agreement help remove a shareholder?

On Behalf of | May 24, 2023 | Litigation |

Disagreements between company shareholders sometimes break out. Such conflicts can be a detriment to the business unless there is a way to resolve them. Sometimes one or more shareholders decide to remove a disruptive shareholder with the help of the shareholders’ agreement.

It is important to abide by the terms of a shareholders’ agreement when removing a shareholder as litigation might result if a shareholder feels mistreated by the other shareholders. Here is a look at important language to check for if you try to part ways with a shareholder.

Look for a buyout clause

Many business contracts contain language allowing partners or stakeholders to buy out the interest of a single shareholder. The agreement should contain an existing price or a formula to determine a price to buy out the interest. This should help the shareholder feel he or she is getting a fair price.

Check for shareholder obligations

A shareholders’ agreement generally spells out what each shareholder should contribute to the business and how to carry out company duties. A breach of any of these clauses could form the grounds to remove a shareholder, even one who holds a majority of company shares.

Examine shareholder rights

Finally, a shareholders’ agreement should describe the rights of shareholders. For instance, the agreement may give a disputing shareholder the right to seek resolution through a method such as mediation or arbitration. This might solve a disagreement without the need to remove the shareholder.

Sometimes a company can negotiate removal terms with a shareholder if there is no legal document that describes how to buy out a shareholder. Examine your company documents carefully for any method that might help you resolve a shareholder dispute.


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