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5 Steps to Remove a Shareholder
Cutting ties with a shareholder isn't simple, but it can be achieved through these five steps.
Written by: Stella Morrison, Senior WriterUpdated Mar 11, 2025
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Table of Contents
Although not ideal, there sometimes comes a point where one shareholder wants to cut ties with another in their company. According to a Reuters’ report, a record 160 activist investors, including 45 newcomers, launched campaigns at global companies in 2024; they urged strategic and operational improvements, CEO changes and other business transformations. This 18 percent increase from 2023 highlights the growing prevalence of shareholder disputes.
While removing a shareholder is a complex process, it’s not impossible — especially with careful planning and adherence to legal protocols.
How to remove a shareholder
Here are five steps you should consider taking when making moves to remove a shareholder.
1. Refer to the shareholders’ agreement.
A shareholders’ agreement outlines the rights and obligations of each shareholder in an organization. Typically, all shareholders create and agree on it to ensure everyone is fairly represented. That way, if you want to cut ties with a shareholder down the line, you can refer to this document for guidance.
This is especially useful when removing a majority shareholder — someone who owns more than 50 percent of the company’s outstanding shares. If they violate anything explicitly stated in the agreement, you can remove them solely based on that offense.
Make sure to be specific with the agreement. It is vital that you review details that can influence how and when to remove a shareholder, as well as any consequences for doing so. Look for details like the dates, number of issued shares, anything related to shareholder equity and the rights of shareholders in the event of a company sale. You should also be on the lookout for other clauses that may impact the shareholder removal process.
When writing a shareholders’ agreement, include a buyout clause that allows directors to purchase a minority share for an agreed-upon price. This will prevent minority shareholders who cannot be voted out from refusing to surrender their shares.
2. Consult professionals.
Before acting, especially without a shareholders’ agreement in place, you need to reach out for professional insight to avoid any legal issues. While you might think the process is simple, it requires much thought and attention.
“In short, removing a shareholder is not something for amateurs,” Stanley P. Jaskiewicz, editorial board member at The American Bar Association, Senior Lawyers Division, told business.com. “You should consult with counsel, under attorney-client privilege, as early as possible. An agreed-upon voluntary buyout between the company and the targeted will almost certainly cost far less than the expense of a contested removal.”
Professionals can help you approach the matter in an objective, negotiable manner, while ensuring you meet any regional requirements in your area. This is crucial in any business decision, particularly ones that might cause tension among business partners. You don’t want to skip this step in the interest of time or money.
“In some cases, the expense of an independent attorney may even be necessary if the company’s counsel has ethical or legal obligations to the target of the removal,” said Jaskiewicz.
Did You Know?
Consulting an attorney before taking action against a shareholder can save you money in the long run. For example, hiring an attorney for a shareholder agreement project costs an average of $880 — although rates can vary based on jurisdiction and project complexity.
3. Claim majority.
Without an agreement or a violation of it, you’ll need at least a 75 percent majority to remove a shareholder. Plus, said shareholder must have less than a 25 percent majority. Removing the shareholder is done through a voting process, and then the shareholder is compensated accordingly upon termination.
Claiming the majority might work in some cases. But, it won’t work against majority shareholders who have already acquired more than 50 percent majority alone — or even majority shareholders with more than 25 percent majority.
4. Negotiate.
If all else fails and you find yourself with no legal reason to remove the individual, you should sit down and negotiate with them. Make sure to discuss a fair value for their shares.
“Although the shareholder may not be able to keep his shares, he almost certainly can dispute the value of what will be paid for the shares and whether his removal occurred for an improper purpose,” said Jaskiewicz.
It can be helpful to consult your shareholders’ agreement and stock purchase agreement when buying and selling stocks. Once you reach an agreement, you can buy back and distribute their shares to individuals in the company.
“If during negotiations you succeed in ousting a shareholder, you must ensure that no shares remain unallocated,” said Anthi Pesmazoglou, operations manager at L-Stone Capital. “All shares will have to be either gifted or transferred to another shareholder by using a stock transfer form.”
5. Create a noncompete agreement.
If you’re successful in removing your shareholder, proceed with caution. Because the process is often rocky, you want to impose a noncompete agreement on your departing shareholder. This will ensure they do not start or enter a business that directly competes with your organization for a set number of days after leaving.
FYI
You may also want to have the former shareholder sign a nondisclosure agreement (NDA) if they had access to sensitive information or trade secrets. However, it's important to consult an attorney to ensure NDA enforceability.
FAQ about removing a shareholder
A shareholder (also known as a stockholder) is a person, board member or entity that owns at least one share of company stock. Holding those shares entitles you to certain profits from the business. Those come in the form of dividends. When a company releases dividends, shareholders receive a portion of those. How much depends on how many shares you own.
Depending on the shareholders’ agreement, some shareholders may also be allowed to help make some companywide decisions on things like board member appointments and merger opportunities.
When it comes to shareholders, there is usually a big difference between privately and publicly owned companies. With privately owned companies, there are typically fewer shareholders, which may mean they have more say in the direction of the company. With publicly owned companies, there are significantly more shareholders (think about how many people own a share of Apple stock), which ultimately means the rights aren't as meaningful.
Most shareholders are bestowed the following rights:
The right to vote on major issues
Ownership of a portion of the company
The right to transfer ownership
Entitlement to dividends
The opportunity to inspect books and records
The right to sue for wrongful acts
The specific grounds for the removal of a shareholder will depend on the shareholders' agreement, company bylaw, and applicable federal and state laws. However, common reasons for shareholder removal include shareholders' agreement violations, illegal activity or misconduct, business operation disruptions, decision-making deadlock, bankruptcy, and failure to meet ownership obligations. Buyout clauses may also go into effect under specific conditions. It's best to seek legal counsel before attempting to remove a shareholder.
Although it may be somewhat difficult, removing a majority shareholder is possible; for instance, if they have violated the original terms of the shareholders' agreement or the company's bylaws.
When a shareholder leaves a company, the remaining members of the company must determine the value of the interest of the shareholder leaving. If there is no plan in place, the company must negotiate in order to buy out the leaving member of the company.
What if a shareholder refuses to sell and you have no agreement in place to force the removal (e.g., buy-sell agreement, mandatory sale clause, drag-along clause, compulsory purchase agreement)? In that case, you could try an organization restructuring, if possible. Some companies have had success using share dilution strategies by issuing new shares to reduce the influence of the noncooperative shareholder. Similarly, a merger or company restructuring could alter the ownership structure in a way that encourages the shareholder to sell.
If none of these approaches work, you might have to face a tough decision: parting ways with the company (dissolution) or learning to work with the individual regardless of your concerns.
Skye Schooley contributed to this article. Source interviews were conducted for a previous version.
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Written by: Stella Morrison, Senior Writer
Stella Morrison is a respected small business owner with a track record of award-winning success, having founded multiple ventures and earned honors for her work. She currently runs two companies, overseeing the staff, finances and a range of other responsibilities. Morrison's expertise spans everything from web development to brand management, making her a versatile leader in the business world.
Beyond her own entrepreneurial pursuits, Morrison offers consultative services to companies on various business topics. In years prior, she worked in community affairs programming and trained young broadcast journalists in radio communication. She also reported for Greater Media Newspapers and wrote a column for the Chicago Tribune's TribLocal. Today, she often partners with the American Marketing Association, contributing to the industry's growth and development.
