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Removing a Shareholder from a Limited Company

Photo credit: Tayloright

Photo credit: Tayloright

Removing a Shareholder from a Limited Company

Shareholders can choose to leave a company whenever they like. Maybe they want to cash in their shares and use the money to buy shares in a different company or to use it for personal use. Sometimes a shareholder will need to be removed due to their death. No matter what the reason for a shareholder leaving, your company cannot have any spare shares that are left un-allocated.

When a shareholder moves on, their shares need to be transferred to someone else, either through the sale or gifting of those shares to another person. When you take on new shareholders, their details should be recorded within your company’s register of members. You will also need to inform Companies House of the change in shareholder details, however this can be left until your next annual confirmation statement submission. Companies House will then update the public register or companies to reflect your change in shareholders.

Let’s take a look at how to remove a shareholder under different circumstances:

Share transfers

Transferring the ownership of limited company shares can be done through the sale of the shares or the gifting of the shares to other people. This is done through a stock transfer form. The responsibility of completing this form lies with the company director, and once completed a share certificate can then be issued to the new shareholder. The new shareholder will then pay the previous shareholder the full value of the purchase price.

Please note that you must pay Stamp Duty on your shares if:

  • you buy shares through a stock transfer form
  • the transaction is over £1,000
  • You pay 0.5% duty, which will be rounded up to the nearest £5.

You may have to pay Capital Gains Tax if you make a profit (‘gain’) when you sell (or ‘dispose of’) shares or other investments. You can see the current list of Capital Gains tax allowances here.

The death of a shareholder

Should a shareholder die, then their share ownership can be passed on to a named beneficiary as outlined in their will. When this happens, the company director will fill out a stock transfer form to complete the hand over of the shares from the deceased shareholder to their inheritor. However, this may not be allowed if there are any restrictions in place within the company articles that prohibit share transfers to non-members. Sometimes these rules are put into place because the company directors may be worried that placing shares into the hands of someone with no business experience, or someone who doesn’t necessarily agree with the company ethos and objectives, may cause a lot of disruption to the company procedures.

In most cases a limited company will prepare some guidance to be placed within their shareholder agreement that specifically deals with the death of a shareholder. This usually entails naming a beneficiary who will receive the shares, or an agreement to make the shares available for sale to existing company shareholders.

Because of the complexity that can surround the death of a shareholder, the company director should consult with or take advice from a solicitor when drawing up their shareholders agreement. This will then help to provide clear guidance towards the transfer of shares from a deceased member.

Shareholder disputes

Sometimes a situation may arise where you may be inclined to force a shareholder to leave the company. Forcing someone to give up their shares can be incredibly difficult. The shareholder in question has every right to keep their shares.

Trying to avoid conflict amongst shareholders cannot always be guaranteed, so a little forethought may be needed to work in a departure procedure into your shareholders agreement. Having a well thought out procedure in place to remove a shareholder can save you a lot of time and hassle. The shareholder would have agreed to the terms and conditions of the share purchase, including the forced removal procedure, so they should be more accepting of the outcome should it need to be enforced.

Minority shares

One option for a company to follow when wanting to remove a shareholder would be to buy out the minority shareholder in question. They can offer a fair price for the minority shareholders shares. However, if the shareholder refuses the offer or refuses to negotiate a fair price, then the next option to look at would be to wind up the company. This may sound like a drastic move, and yes, it is quite a time-consuming process, but if the minority shareholder holds less than 25% of company shares, then it may be your only option. You will need a 75% majority of shareholder votes to do this and pass a special resolution to wind up the company.

Should you decide to wind up your company, but it is solvent, you can then start a members voluntary liquidation procedure. You can then set up a new company and transfer your old company assets to your new company, thus excluding the minority shareholder that you want to remove. A lengthy process, but effective if you have no other option.

The register of members

As a limited company, you must keep an up to date register of members. This is a statutory requirement and lists all the names and addresses of your members, or guarantors for companies that are limited by guarantee. This register also contains the date each member were registered with the company and shows what shares they hold. It will also record the dates where people ceased to be members. This is the date that their shares were transferred to others.

The responsibility for keeping the register of members up to date falls to the company director. This register should always be kept available for public inspection at all times and is usually held at the company’s registered office address, or at an alternative inspection address (SAIL address).

Companies House

When you lose or gain a shareholder, the company director should notify Companies House of the change. You will need to supply them with the name and date of membership of new shareholders as well as the name and date of the departure of a shareholder. This should be done through your next annual confirmation statement, and you can wait until your next statement is due for submission, or you can update Companies House with the changes before your due date – this is up to you.

Further reading:

How to close or dissolve a company

 

start your company formation

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