In Texas, disputes between majority and minority shareholders in closely held businesses are not uncommon. Whether driven by financial disagreements, conflicts over strategy, or personal animosities, these disputes often raise the question: can a majority shareholder remove a minority shareholder? While majority shareholders wield significant power, their rights are not unlimited, and the removal of minority shareholders must adhere to legal and contractual guidelines.
This article will explore the legal framework, processes, and considerations involved in removing minority shareholders in Texas.
What Is a Majority Shareholder?
A majority shareholder is an individual or entity that owns more than 50% of a company’s shares. With this ownership, they often have significant influence over company decisions, including voting rights on major transactions, changes in governance, and strategic direction. However, their powers are not absolute and are typically governed by state laws, corporate bylaws, and shareholder agreements.
What Is a Minority Shareholder?
A minority shareholder is a person or entity owning less than 50% of a company’s shares. While they may not have the same level of control as majority shareholders, minority shareholders still have certain rights, such as voting on specific issues and inspecting corporate records. These rights aim to protect them from actions that might unfairly disadvantage their position in the company.
Can a Majority Shareholder Remove a Minority Shareholder?
The ability of a majority shareholder to remove a minority shareholder depends on several factors, including:
- The existence of a shareholder agreement or buy-sell agreement.
- State laws and regulations.
- The conduct of the minority shareholder.
In many cases, removal is easier when a well-drafted forced buyout agreement or similar provision exists. These agreements may specify conditions under which shareholders can be bought out and the process for determining the value of their shares.
1. Using a Buy-Sell Agreement
A buy-sell agreement often outlines the terms for removing a shareholder. Common triggers include:
- Breach of the shareholder agreement.
- Disruptive behavior affecting the company.
- Involvement in illegal activities.
If such an agreement exists, the majority shareholder can initiate a forced buyout by following the process specified in the agreement.
2. Negotiating a Buyout
If no formal agreement exists, negotiating a voluntary buyout with the minority shareholder is often the next step. Offering a fair market value for the shares can help avoid disputes.
3. Litigation for Removal
If a minority shareholder refuses to sell their shares or causes harm to the company, the majority shareholder may seek legal intervention. Courts can order the removal of a shareholder in cases of fraud, misconduct, or breach of fiduciary duty.
Can a Minority Shareholder Force a Buyout?
A minority shareholder can force a buyout under certain circumstances, such as:
- Oppression by majority shareholders.
- Breach of fiduciary duties by the majority.
- Triggering events outlined in a buy-sell agreement.
If the minority shareholder can demonstrate that their rights have been violated, they may petition the court for a forced buyout or other remedies.
Minority Shareholder Oppression
Minority shareholder oppression occurs when majority shareholders use their control to disadvantage minority shareholders. Common examples include:
- Blocking access to corporate records.
- Denying voting rights.
- Refusing dividends in bad faith.
In Texas, minority shareholders who experience oppression can take legal action to protect their interests, which may include forcing a buyout of their shares or seeking other financial compensation.
Can a Majority Shareholder Sell the Company?
A majority shareholder can generally sell the company, even if minority shareholders object. However, certain conditions apply:
- Proper notice must be given to all shareholders.
- The sale must comply with internal governance documents.
- The sale must serve the best interests of the company, not just the majority shareholder.
If the sale appears to be motivated solely by an attempt to eliminate minority shareholders, it may be challenged as a breach of fiduciary duty.
Can a Minority Shareholder Block a Sale?
A minority shareholder typically cannot block a sale unless:
- They have specific contractual rights allowing them to veto certain actions.
- The sale violates state laws or the company’s governing documents.
- They can prove the sale was made in bad faith.
While minority shareholders have limited control over corporate decisions, they may seek legal remedies if their rights are infringed during the sale process.
Rights of Minority Shareholders in Texas
Minority shareholders in Texas are entitled to certain rights to ensure fair treatment, including:
- Access to Corporate Records: Minority shareholders can request access to financial statements, meeting minutes, and other records.
- Voting Rights: While limited, minority shareholders can vote on major decisions, such as mergers or amendments to corporate bylaws.
- Dividends: If the company issues dividends, minority shareholders are entitled to their fair share.
When these rights are denied, minority shareholders may pursue legal action against the company or majority shareholders.
Can a Shareholder Be Forced to Sell Shares?
A shareholder can be forced to sell their shares if:
- A valid buy-sell agreement or shareholder agreement includes such provisions.
- A court orders the sale due to misconduct or violation of agreements.
Forcing a shareholder to sell requires adherence to legal and contractual procedures to avoid potential lawsuits.
Can a Majority Shareholder Close a Company?
Yes, a majority shareholder can initiate the closure of a company, but they must follow the proper legal and procedural steps. These include:
- Voting on the dissolution of the company.
- Settling debts and distributing assets.
- Filing a Certificate of Termination with the Texas Secretary of State.
If the closure is motivated by an attempt to harm minority shareholders, it could lead to legal challenges.
How to Get Rid of a Minority Shareholder
Removing a minority shareholder often requires careful navigation of legal, financial, and procedural hurdles. Here’s a step-by-step guide:
1. Review Governing Documents
Examine shareholder agreements, bylaws, or operating agreements for provisions related to removal or buyouts.
2. Negotiate Terms
Attempt to negotiate a buyout at a fair price, avoiding potential legal disputes.
3. Invoke Legal Provisions
If agreements allow, initiate a forced buyout or removal based on the minority shareholder’s conduct.
4. File a Lawsuit if Necessary
If negotiation fails, seek court intervention to remove the shareholder. Be prepared to demonstrate how their actions harm the company.
Avoiding Legal Pitfalls
The removal of a minority shareholder can expose the company and majority shareholder to lawsuits if not handled properly. Common pitfalls include:
- Failing to follow contractual or procedural requirements.
- Offering an unfair valuation for shares.
- Acting in bad faith or breaching fiduciary duties.
To avoid these risks, consult with a business attorney before taking any action.
How an Experienced Shareholder Dispute Lawyer Can Help
Removing a minority shareholder or navigating shareholder disputes requires experienced legal counsel. At Roquemore Skierski Business Lawyer, we specialize in helping businesses address shareholder issues, including drafting buy-sell agreements, enforcing shareholder rights, and resolving disputes through negotiation or litigation.
If you’re facing a complex shareholder situation, contact Roquemore Skierski Business Lawyer today. Let us provide the guidance and representation you need to protect your business and achieve a favorable outcome.