How to remove a shareholder of a company

Most directors and shareholders are the same persons in SMEs, known as ‘quasi partnerships’.  So what happens to the shares if a director leaves or ceases to play their part in running the business? Can you force a sale of the director’s shares? Here’s a discussion on how to remove a shareholder of a company.

The majority shareholders can remove a director by passing an ordinary resolution (51% majority) after giving special notice. That much is fairly straightforward.  But take care, since if the director is also an employee you will need to terminate their employment. A director who has been dismissed may have a claim for unfair dismissal. The director will continue to own the shares and will continue to be entitled to their share of dividends.

Can you force a sale of the shares?

There is no automatic right for the majority shareholders to force a sale by a minority shareholder.  Conversely, there is no automatic right for a minority shareholder to force the majority to buy their shareholding.

So what are the ways of removing a minority shareholder of a company?

There are several possible ways to remove a shareholder of a company or force a sale of their shares, but care needs to be taken in each case, and a tactical approach is required.

  • Check the articles of association of the company to see if they contain drag-along provisions which would enable the majority of the shareholders to force the minority to sell in the event of a buyout of the company.
  • Consider passing a special resolution (75% majority) to alter the articles to include provisions to force a sale of the shares, say for fair value. However, any alteration should not amount to an oppression of the minority and should not be unjust.
  • Check if there is a shareholders’ agreement which contains a ‘buy-back’ clause which can be invoked if a shareholder leaves the company.  This is sometimes known as a ‘bad leaver’ provision.
  • Consider increasing the remuneration of the remaining directors, and reducing sums paid by way of share dividends. This may not be tax efficient, but may be preferable to paying dividends to a shareholder who no longer participates in the running of the company. But take care, since you should be able to justify this course of action.
  • Once you have assessed your options, you should start negotiations with a view to reaching agreement for the purchase of the shares for fair value. You should first discuss with your accountant carrying out a valuation of the shares. A minority shareholding will often be valued at a figure below what the shares would be worth based on a percentage of the whole. Check to see if the Articles contain a formula for valuing a minority shareholding.
  • Care should be taken to avoid a dispute which could end in costly litigation. A minority shareholder has the right to apply to the court claiming ‘unfair prejudice’. The court will usually order a sale of the leaving shareholder’s shares at a determined value. Company litigation is expensive and the costs would usually be paid for by the individual shareholders. However, the threat of such proceedings can be used to put pressure on the minority shareholder to reach agreement for the sale of their shareholding.
  • The company could consider bringing a claim against the departing director if it can show it has suffered some loss as a result of a breach of his duties as a director. Care should be taken, however, to check that the other directors have not themselves been in breach of their duties.
  • If the majority hold 75% of the shares, then you could consider the nuclear option of winding up the company. If a solvent company is wound up through a members voluntary liquidation (MVL), the company’s assets can be transferred into the name of Newco, which would not issue shares to the minority shareholder in Oldco.

Conclusion – Removing a shareholder of a company

Each case needs to be carefully considered on its merits.  Most shareholders disputes are resolved by having the majority buy out the minority shares for fair value.  A well drafted solicitor’s letter making an offer to purchase the shares on terms which would most likely be awarded by a court (adopting the principles in the leading case of O’Neill v Phillips) will put pressure on the minority shareholder to negotiate sensibly, otherwise they risk incurring substantial legal costs if they fail to do so.

To avoid these situations arising in the first place, companies should put in place suitably drafted articles of association and a shareholders’ agreement.

If you would like to discuss any issues which affect your company, please contact Gil Percival at or call 020 7940 4000 or any member of our Commercial Department.

Latest property fraud decision

Mr Justice Dicker QC, sitting as a High Court Judge, delivered judgment in case that will join the canon of recent authorities on solicitors’ negligence and liability in property fraud cases.

On the heels of the Purrunsing decision handed down by HHJ Pelling in April this year, the case of P&P Property Ltd v (1) Owen White & Catlin LLP (2) Crownvernt Ltd t/a Winkworth [2016] EWHC 2276 (Ch) examines the seller’s solicitors’ warranty of authority, negligence, and breach of trust in the conveyancing transaction, but with a different outcome.

In P&P the Claimant was duped out of more than £1 million by a fraudster, calling himself “Mr Harper”, who impersonated the real owner of the property. P&P Property sued the fraudster’s solicitors, and the estate agent, for loss of the purchase money, and money spent on work to the property before the fraud was discovered.

The Court rejected P&P Property’s claim that the seller’s solicitors, Owen White, gave an implied warranty of authority that it acted for the true Mr Harper, and consequently did not impose on them strict liability for P&P’s loss.

To understand the decision, it is necessary to look at the line of authorities on breach of warranty of authority that were referred to. The unique challenge for the Judge in P&P was reconciling the authorities with the facts. None of the earlier authorities dealt with a fraudster impersonating the right of an individual to sell a property. P&P might be received as clarification of the law on implied warranties in this scenario, though perhaps an appeal will follow.

The starting point in P&P was Penn v Bristol & West Building Society [1997] 1 WLR 1356, which was a case involving a mortgage fraud by a husband, unbeknownst to his wife. It was held that the solicitor had warranted to the lender that he had the authority of both Mr and Mrs Penn, although in fact he was not authorised by Mrs Penn at all. As a result, the solicitor was liable to the mortgagee for giving a warranty which was incorrect. The position was reinforced in Bristol & West v Fancy Jackson, another mortgage fraud case, involving forgery of a wife’s signature on the mortgage deed. In Fancy Jackson the solicitors acted for both the lender and borrower (unlike Penn), but it was held that this made no difference to the solicitor’s warranty to the lender that it had the wife’s authority.

There was a move away from the strict liability cases following Platform Funding v Bank of Scotland [2008] EWCA Civ 1016 where the Court sought to curtail the professional’s liability by highlighting the need to identify special facts or clear language to impose strict liability where the usual obligation would not be strict but reasonable care. The principle took root in Excel Securities v Masood [2010] Lloyds’ Rep PN 165 where the Court held that, in another instance of mortgage fraud, the solicitors had done no more than warrant that they had the authority to act on behalf of a person calling himself Mr Goulding claiming to be the owner of the property. In Cheshire Mortgage Corporation v Grandison [2012] CSIH 66 the approach in Excel was endorsed and the Court addressed the need to consider the attributes of any warranty in determining its scope.

In P&P the Judge addressed the difficulty of marrying up Penn and Excel, saying that if the solicitors in Excel had been instructed by a fraudster who falsely claimed that he had the authority of a company, the outcome would probably have been the same as in Penn. Similarly, he asked whether the result would have been different in Penn, if the forged signature of Mrs Penn, had not been done by Mr Penn, but by someone who had impersonated Mrs Penn. There was no answer to this, which reveals judicial reservations about the correct approach.

Turning to P&P, the Judge began with examining the central justification for the doctrine of warranty of authority. The doctrine operates as redress against an unauthorised agent where there is no claim against the principal. P&P Property would still have a claim against the fraudster, though the Judge identified that the claim would serve no benefit because the fraudster was in Dubai and had made off with the funds. However, the Judge contrasted the position of P&P, where there is a claim against the principal, to a case where the doctrine could be “justified”. The Judge hints at his unease with the operation of the doctrine in this context, though this will be no comfort to victims of property fraud.

The Court held that the question of whether a warranty has been given can be approached in two ways. Firstly, by identifying who the agent represented that they had authority to act for, and secondly identifying what attributes, if any, the solicitor represented that such a person had.   P&P Property placed reliance on the seller’s solicitor, Ms Lim, having signed the contract for sale on behalf of the fraudster. It argued that this should be construed as Ms Lim warranting that she had authority to act on behalf of the true owner. Counsel for Owen White argued that the Excel approach should be adopted, so that the contract be interpreted as identifying only the person who called himself Mr Harper and claimed to have a right to sell the property.

The Judge found force in P&P Property’s argument that the Seller’s Solicitor had warrantied that they acted for the true owner, and appeared to teeter on the edge of pushing the boundary of Excel. However, he pulled back, saying that it would be wrong to construe the contract in this way because it would be going beyond the basic representation, and would wrongly impose the obligation to perform the contract on the solicitor. The fact of a solicitor having signed a contract on behalf of a fraudster is therefore not sufficient for a claimant to get home on establishing an implied warranty of authority.

The Judge ultimately determines (as in Excel) that if the scope of the warranty had been expressly raised at the time of the transaction, Ms Lim and her counter party would not have understood her to have been warranting that she had the authority of the true Mr Harper. That supposition as to what was intended, defeated the claim based on warranty of authority.

The result will surely be a relief for conveyancers, however, as the decision is difficult to marry up to previous decisions, it may well not be followed going forward. Leave to appeal was granted, hence long overdue clarification in this area may well be forthcoming.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*