Shareholder removal. This seems to be coming up a lot lately: small businesses trying to get rid of “partners” or specifically, shareholders. This article will discuss some ways that a small North Carolina business can move out unproductive or unwanted shareholders. It’s not always easy or pretty.
This is by far the easiest way to disassociate a shareholder from a corporation, inasmuch as even contested disputes often wind up settling by consent. Usually it will be the productive “owners” trying to move out a co-owner who has not lived up to his/her promise when the business started, either through capital contributions, sweat equity, or the use of valuable equipment. It has been my experience that such an unproductive owner more or less knows s/he is not living up to the initial promise made when the business started. Have a talk with that person; if the business is unprofitable or barely getting by, I’ve seen the non-productive shareholder voluntarily surrender his/her shares back to the business. Sometimes s/he will ask for a nominal payout; sometimes they want a much bigger payout. Either way, this is still the easiest way to get rid of a co-owner and keep legal and valuation expenses down.
A much more difficult process, especially if the corporations Bylaws do not provide for such a mechanism. If the Bylaws or shareholder agreement/s provide for a buyout, the majority shareholders can vote to trigger the buyout mechanism. These procedures usually involve giving notice; valuing the business; then forcing the buy-back or buy-out. If the Bylaws do not have such a mechanism, the majority shareholders can vote to amend the Bylaws to add one, and then trigger it. This can get messy because some states have enacted statutory minority shareholder protections giving rights to minority shareholders who feel aggrieved due to “oppressive action” of the Board or the majority of shareholders.
Dissolve the Business and Start Over
Perhaps a drastic step, but if done right it can be fairly quick and easy, depending on the nature of the business, the kinds of assets it holds, and other factors. The majority shareholders vote to dissolve the business, and go through the statutory dissolution procedure. In the meantime, the majority shareholders have formed a new business whose purpose will be to (a) acquire the assets of the old corporation; and (b) begin operating the new corporation in the space left by the old corporation. This can solve the valuation problem (value of an existing, operating business), and only leaves the issue of what are the demised businesses assets worth.
Just Plain Start Over
Often times the easiest solution: the working shareholders merely stop working at the old business (they can dissolve it if necessary to deal with creditors or to liquidate assets) and start operating a new business in the space left by the old one. Provided there are no contractual restrictions on competing, they may even be able to use old client lists, pricing sheets from vendors, even a similar name (“The New Joe’s Carpeting” for example).
What these various options achieve is setting up a situation where the non-productive shareholder has little incentive to hire a lawyer, a business valuation expert, and file a lawsuit, inasmuch as the value of the business often approaches zero if the majority shareholders are no longer participating. Again, it all depends on the nature of the business, the true value of the assets, and other factors.
Of course, there are other ways to deal with unproductive owners and minority shareholders such as squeeze out mergers or reverse stock splits for shareholder removal. If you’re having a problem like this, and you’re in the greater Asheville area, call me at (312) 671-6453 for legal help.