Disputes between majority and minority shareholders in closely held companies are quite common. Even so, each case is entirely unique.
This article provides answers to common questions posed by both majority and minority shareholders when disputes arise. It is a general guide to help you understand what factors must be considered to answer questions like:
- Can a majority shareholder remove a minority shareholder?
- Can a majority shareholder sell the company?
- Can a minority shareholder block a sale?
- Can a majority shareholder be removed?
At Wood Edwards LLP, a large portion of our practice is dedicated to litigating shareholder dispute cases and helping our clients achieve their goals. If you’re in the midst of a dispute with another shareholder in your company, we invite you to contact us anytime to discuss your situation.
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Or, keep reading for answers to common questions related to shareholder disputes.
Removing a minority shareholder will be simplest if you have a well-drafted shareholder’s agreement.
Such an agreement will usually stipulate that the majority shareholder can buy out the minority at a predetermined price, or at a price determined by a mechanism specified in the agreement.
But if you don’t have an agreement, or if your agreement doesn’t include such a buy-out clause, we’ll need to consider other options.
Lacking a prior written agreement, we’ll first attempt to negotiate a purchase of the minority shareholder’s stake. Sales of minority shares in closely-held corporations will generally be at a discount, but it’s still necessary to make a reasonable offer, or else the minority shareholder will simply refuse it.
If we can’t come to an agreement, there’s no simple way to compel the minority shareholder to sell. In general, the majority shareholder will need to address the minority’s reasons for refusing to sell, convincing the minority to accept a fair value for their shares.
If the minority shareholder were only interested in their shares’ monetary value, after all, it would generally be possible to agree on what that value was, and to buy their shares for that amount. If they refuse to sell given a fair offer, it will often be because they value something else about being a partial owner. If you remove the minority shareholder’s non-monetary reasons for retaining their shares, they may become more willing to part with them.
Minority shareholder oppression occurs when majority shareholders take advantage of their privileged position to the detriment of the minority shareholders. In other words, it’s when majority shareholders do things that prevent the minority shareholders from enjoying a fair benefit of the business.
Avoiding minority shareholder oppression typically means that majority shareholders must refrain from:
- Restricting minority shareholders’ access to corporate records;
- Blocking them from voting on matters on which they are entitled to vote;
- Violating the terms of a shareholder agreement;
- Breaking any business, corporate, or other laws;
- Breaching the terms of employment or other contracts; or
- Doing anything that goes against the terms of the operating agreement, bylaws, or other internal governance documents.
There’s a fine line between, for example, rightfully exercising your rights as a majority shareholder and unlawfully oppressing minor shareholders.
Wood Edwards can help you make sure you don’t cross it.
The short answer is yes. It’s possible for a majority shareholder to sell the company, even if the minority shareholders don’t agree to it. That said, the majority shareholder would still need to abide by the terms of existing internal governance documents, agreements, and laws.
In most cases, majority shareholders cannot unilaterally sell the company without any input from the other shareholders. But it’s possible that a majority shareholder can successfully vote to sell the company, and few or none of the minority shareholders agree to the sale. Even so, the majority shareholders need to follow the proper procedure. Typically, that means:
- The required notices have to be sent out;
- The board of directors (if a corporation) or managing members of the LLC should agree to the sale;
- The sale must be in the best interest of the company; and
- The company must hold a vote.
Majority shareholders who sit on the board of directors or are managing members of the LLC must exercise extra care. Why? If your motivation for selling the company is to eliminate the minority shareholders, this can create issues for you and the business.
The board of directors, for example, has to show that the sale is in the company’s best interest, not just the majority shareholders. If you can’t articulate valid reasons why selling the company accomplishes more than a chance to get rid of the minority shareholders, you may be in trouble. This can constitute a breach of fiduciary duties, violate contracts, or break the law.
Talking to a business attorney early in the process can help limit the potential that you cross lines and open yourself up to liability.
Generally, a minority shareholder cannot, on their own, control a company. But they can work with other minority shareholders to overcome the majority’s will in votes. If enough minority shareholders combined shares constitute a majority act in unison, they can exercise significant control over some aspects of the company.
But it takes more than voting power to control the company. Majority shareholders often have more than a high percentage of the shares in the company. They may sit on the board of directors, hold a high-ranking corporate officer position, or be a key player in the business in other capacities. In that way, their influence extends beyond voting power into more deep-seated reaches of the company.
Minority shareholders may be able to swing a vote their way by working together. But their control is limited to matters that are put to a vote. Their ultimate decision-making ability may be minimal without a position on the board of directors.
In states like Texas, for example, the shareholders’ agreement can limit or eliminate the board of directors’ managerial power. Instead, the body of shareholders can take on the role of the board of directors. Minority shareholders in this position are even more disadvantaged without being able to elevate their status to a majority shareholder.
Absent breach of a contract or the law, a shareholder can’t typically force another shareholder to sell. But a shareholder can seek to enforce the terms of a buy-sell agreement, a shareholder agreement, or another valid contract.
If part of the terms of the contract requires that the shareholder sell their shares, then you can force a shareholder to sell shares.
But doing so can be costly. What’s more, if you don’t follow the proper procedures, you may unwittingly be breaking the law and opening yourself up to liability.
To avoid litigation, you may be better off seeking to negotiate with the shareholder whom you want to sell their shares. With the right price and smooth dealing, it may be that they will agree to sell their shares. Putting in this work to negotiate necessarily involves understanding and listening to both sides. For some, this is all that is needed to rekindle an amicable business relationship.
For others, reconciliation is not possible.
Whether you anticipate a litigious or easy resolution, involve a business attorney early in the process. An attorney can help you understand your rights and the legalities at play. They will walk you through the contingencies and legal options, suggest solutions, and help you carry those out.
Having an advocate communicate on your behalf eases the friction and encourages the successful settlement of the issue. If you and the other parties cannot resolve the matter outside of court, the attorney can help ensure to file the appropriate lawsuit on time.
RELATED: Buy Sell Agreements in Texas
A minority shareholder may force a buyout if the applicable law or an existing contract allows it. A careful review of the facts, laws, and contracts at play can immensely change the outcome of your actions.
Wood Edwards has extensive experience in the boardroom and the courtroom. We routinely assist shareholders in tailoring solutions that minimize liability and maximize their benefits.
A minority shareholder typically can’t block a sale on their own unless:
- They have the support of enough minority shareholders to overcome the will of the majority; or
- The contracts or applicable law require that all shareholders vote in favor; or
- The sale would violate existing laws or agreements.
How the minority shareholder can block the sale depends on the applicable laws, the circumstances, and the existing contracts. Before filing a lawsuit in many jurisdictions, shareholders may need to follow internal protocols and take specific steps. Should those be ineffective, the shareholder may be able to explore additional legal options.
Anytime a shareholder seeks to prevent or force an action, retaining appropriate legal counsel is vital. Oversights or overzealous actions can create a mountain of legal paperwork, preventing you from accomplishing what you set out to achieve in the first place.
You can remove a majority shareholder from the company if the applicable law, the terms of the internal governance documents, or existing agreements allow it. For example, if the majority shareholder breaks the law, this may constitute automatic grounds for removal. Absent a clear-cut violation of the law, you may need to have the support of enough minority shareholders to swing the vote in favor of removal.
Even so, the shareholder may be entitled to adequate payment for their shares in the company. The value of the shares may be predetermined based on an existing buy-sell or shareholder agreement. Or it may require a fair market value calculation. Jurisdictions like Texas sometimes require that the board of directors determines the value of the shares.
Anytime you seek to force out or remove a shareholder, tread carefully. Any misstep can be grounds for a lawsuit. The lawsuit may be more of a headache than it would be to allow the shareholder simply to continue in that role.
For that reason, it’s critical that shareholders consult a business attorney of their choosing. In-house counsel typically represents the company. They usually cannot give target legal advice to individual shareholders within the company. Any advice they do provide is likely to be shrouded in disclaimers. They may even be required to disclose the information to other company members.
Having others know that you are asking questions about removing a majority shareholder can create problems for you. Talking to outside business counsel eliminates the risk that they will disclose this information to the company without your permission and knowledge.
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