How to Remove a Shareholder from a Company in Australia

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In Short

• Removing a shareholder requires legal grounds, often outlined in the company’s constitution or shareholders’ deed (SHD).

• Voluntary exits are ideal; if that’s not possible, compulsory share transfers or buy-backs may be necessary.

• A well-drafted SHD helps prevent disputes and ensures a smoother removal process.

Tips for Businesses
To avoid difficulties when removing a shareholder, ensure your company has a comprehensive shareholders’ deed (SHD) that includes clear procedures, valuation methods, and dispute resolution clauses. Regularly review and update these documents to reduce the risk of conflicts, and seek professional legal advice if needed.

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Table of Contents

• Legal Grounds for Removing a Shareholder
• Steps to Remove a Shareholder
• Legal Considerations
• Practical Challenges
• Preventive Measures
• Key Takeaways
• Frequently Asked Questions

Removing a shareholder from a company in Australia is a complex process that requires careful consideration of both legal and practical implications. This article outlines the key steps and considerations involved in removing a shareholder, including the legal grounds, procedures, and potential challenges that may arise. 

It’s crucial to note that without a well-drafted shareholders’ deed (SHD), forcing a shareholder to exit is extremely difficult and often practically impossible, underscoring the importance of having an SHA in place for companies with multiple shareholders.

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Legal Grounds for Removing a Shareholder

Before initiating the removal process, it’s crucial to establish valid legal grounds. The most common reasons for removing a shareholder include:

• breach of the SHD;
• misconduct or actions detrimental to the company;
• failure to fulfil obligations as a shareholder;
• insolvency or bankruptcy of the shareholder; or
• death of the shareholder.

It’s essential to note that merely disagreeing with a shareholder or seeking to consolidate control is not sufficient grounds for removal. The process must be conducted in accordance with the company’s constitution, any relevant statutory instruments (such as the SHD, if applicable), and relevant legislation, primarily the Corporations Act 2001 (Cth) (the Corporations Act). Without a comprehensive SHD, the options for removing a shareholder are severely limited, highlighting the critical need for an SHD.

Steps to Remove a Shareholder

Review Company Documents

The first step is to thoroughly review the company’s constitution and any SHD. Generally, these documents will outline specific procedures for removing shareholders and may include provisions such as:

• compulsory share transfer clauses;
• pre-emptive rights for existing shareholders to purchase the shares; or
• dispute resolution mechanisms.

It’s important to note that without an SHD, these crucial provisions may be absent, making the removal process significantly more challenging or even impossible.

Negotiate a Voluntary Exit

Where possible, the most straightforward solution is likely to negotiate a voluntary exit with the shareholder. A voluntary exit may be preferable for investors and incoming shareholders rather than a forced exit. It will also mitigate the chance of a dispute arising. This process typically involves:

• discussing the reasons for the proposed removal;
• agreeing on a fair value for the shares held by the exiting shareholder;
• agreeing whether the exiting shareholder’s shares will be transferred to another existing shareholder or a third party, or whether the company will buy back their shares; and
• determining the other terms of the exit, including any ongoing obligations or restrictions on the exiting shareholder and/or the Company.

Compulsory Share Transfer or Share Buy Back

If negotiation fails, the company may need to enforce a compulsory share transfer or buyback, as specified in the company’s constitution or shareholders’ agreement (if applicable). At a high level, this process usually involves:

• issuing a formal notice to the shareholder;
• valuing the shares (often through an independent valuation by an accountant);
• arranging for the purchase of shares by the other shareholders or a third party; and/or
• the buy-back of shares by the company.

Shareholder Resolution

In some cases, removing a shareholder may require a resolution passed by other shareholders. The specific requirements will depend on the company’s constitution and/or shareholders’ deed, and it will dictate the type of resolution required (ordinary or extraordinary resolution). Again, without a comprehensive SHD, the ability to remove a shareholder through a resolution may be severely restricted or non-existent.

Court Order

As a last resort and in limited circumstances, the company or other shareholders may be able to  seek a court order to remove a shareholder:

• to enforce  specific performance of the shareholders’ deed; or
• if that shareholder is also a director and has breached their director’s duties or oppressed another shareholder within the meaning of the Corporations Act.

You should be aware that applying to the court for an order is rarely an available solution. 

Legal Considerations

Throughout the removal process, several legal considerations must be kept in mind:

1. Oppression Remedies

The shareholder being removed may have grounds to claim oppression under section 232 of the Corporations Act. This provision protects minority shareholders from unfair, prejudicial, or discriminatory actions taken by the majority shareholders or officers of a company.

2. Directors’ Duties

Company directors must ensure that the removal process is conducted in the best interests of the company and compliance with their fiduciary duties.

3. Fair Value

Determining a fair value for the shares is crucial to avoid disputes and ensure a transparent process. This often requires an independent valuation, considering factors such as:

• the company’s financial position and whether it is able to complete a share buy-back;
• future prospects and cash flows;
• market conditions; and
• are there any requirements for valuation in the company’s constitution or shareholders’ agreement?

Without a comprehensive SHD that outlines valuation methods, this process can become particularly contentious and challenging.

4. Tax Implications

Depending on the method by which a shareholder is removed, the process can have tax implications for both the company and the departing shareholder. We recommend seeking tax advice to structure the transaction in the most optimal manner. It is advisable for the shareholder who is being removed to receive independent tax advice on the transaction as well.

5. Confidentiality and Restraint of Trade

Consider including confidentiality clauses and restraint of trade provisions in any exit agreement to protect the company’s interests. These provisions are typically included in an SHD.

Practical Challenges

Removing a shareholder can present several practical challenges as follows:

• Business Disruption: The process can be time-consuming and may disrupt normal business operations, especially if the shareholder is actively involved in the company.
• Reputational Risk: Disputes over shareholder removal can damage the company’s reputation, potentially affecting relationships with investors, clients, suppliers, and other shareholders.
• Financial Strain: Buying out a shareholder can place significant financial strain on the company or remaining shareholders, particularly for small or medium-sized enterprises, depending on the value of the shares being purchased.
• Loss of Expertise: If the departing shareholder is also an employee, contractor or director of the company, they may have valuable skills or knowledge. Their removal may create a skills gap within the company.

These challenges are often exacerbated in the absence of a comprehensive SHD, which would typically provide a clear framework for addressing such issues.

Preventive Measures

To minimise the potential for disputes and simplify the removal process, companies should:

• have a well-drafted shareholders’ deed that clearly outlines removal procedures and valuation methods;
• regularly review and update the company constitution and shareholders’ deed;
• maintain open communication among shareholders to address issues before they escalate; and
• ensure the company’s constitution and/or shareholders’ deed has a clear dispute resolution mechanism.

The importance of these preventive measures, particularly a comprehensive SHD, cannot be overstated. Without them, companies may find themselves in a position where removing a shareholder is practically impossible or costly and time-consuming.

Key Takeaways

Removing a shareholder from a company in Australia is a complex process that requires careful navigation of legal, financial, and practical considerations. While it’s often preferable to negotiate a voluntary exit, companies must be prepared for more challenging scenarios that may require compulsory transfers or even court intervention.

To protect the interests of all parties involved, it’s crucial to follow proper procedures, ensure compliance with relevant legislation and governing company documents, and seek professional legal and financial advice throughout the process. By taking a thorough and considered approach, companies can navigate the challenges of shareholder removal while minimising disruption to their operations and relationships with the shareholders.

Above all, this article underscores the critical importance of having a comprehensive SHD in place for companies with multiple shareholders. It provides a clear framework for addressing potential disputes and shareholder exits, significantly reducing the risks and challenges associated with removing a shareholder.

If you have any questions, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What are the legal grounds for removing a shareholder?

The most common legal grounds for removing a shareholder include: 

• breach of the shareholders’ deed (SHD);
• Misconduct;
• failure to fulfil obligations;
• insolvency or bankruptcy; and 
• the death of the shareholder. 

How can companies prevent shareholder disputes?

Companies should have a well-drafted shareholders’ deed outlining removal procedures, valuation methods, and dispute resolution mechanisms. Regularly reviewing and updating company documents, as well as maintaining open communication among shareholders, can also help prevent conflicts of interests.