How to remove a shareholder from a limited company

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Shareholders can leave a company at any time for a number of reasons. Perhaps they’d like to recoup an investment, remove their association from a company or must simply be removed due to death. Whatever the reason, their shares need to be transferred by sale or gift to someone else, because you cannot have unallocated shares in your company.

The new shareholder’s details should be recorded in the company’s register of members. Companies House must also be notified on the next annual confirmation statement (formerly the annual return) to allow them to update the public register.

Transferring ownership of shares

Limited company shares can be sold or gifted to other people by way of a stock transfer form. The company director is responsible for completing this form to officially transfer ownership from one person to another. A share certificate should then be given to the new shareholder, and they will be required to pay the purchase price (if required) to its previous owner.

Free share certificate template download

The death of a shareholder

If a shareholder dies, the ownership of their shares may pass under the terms of his or her will to a named beneficiary. In such cases, the company director will have to execute a stock transfer form to officially hand over ownership to the inheritor; however, this will be subject to any restrictions in the articles that might prohibit the transfer of shares to non-members. After all, transferring shares to someone who does not possess the appropriate business experience or subscribe to the company’s objectives and vision can cause huge problems.

Many companies include provisions in a shareholders’ agreement to deal with the death of a shareholder. It is common for an agreement to dictate that, upon the death of a shareholder, his or her shares will pass to a specific person or be made available for purchase by the company or existing company members.

The death of a shareholder is a particularly complex area for many companies, so it really is best to consult a solicitor and prepare an effective shareholders’ agreement that provides clear resolutions for the transfer of shares due to death.

Forcing a shareholder to leave

Shareholder disputes can cause a number of problems, so do try to avoid them as best you can. It’s incredibly difficult to force members to leave a company. After all, they are under no obligation to sell their shares unless the shareholders’ agreement or articles are well-drafted to include a specific departure procedure.

The first course of action you must take to resolve an issue should be negotiation. The majority shareholders could offer a fair value for the minority’s shares. If they refuse to negotiate, you could then take drastic measures by winding up the company; however, you can only do this if the minority has less than 25% of the issued shares. You will need a 75% majority of shareholder’s votes to pass a special resolution to wind up the company.

If the company is solvent, winding up the company is a feasible option. You can start a members’ voluntary liquidation and transfer the company’s assets to a new company that excludes the minority. This can be costly and time-consuming, but it may be the only course of action in certain situations.

Best advice: avoid this potential nightmare by drafting a really good shareholders’ agreement when the company is set up. Otherwise, consult a solicitor for professional advice.

Updating the register of members

Every limited company must keep a register of members. This statutory item is used to record the names and addresses of all members (or guarantors if the company is limited by guarantee), the date they were registered as a member of the company, details of the shares they hold and the date they ceased to be a member (where applicable). Shareholders become members on the date they purchase shares. They cease to be members on the date their shares are transferred to someone else.

It is the company director’s responsibility to ensure this register is accurate, up-to-date and kept available for public inspection at the company’s registered office or alternative inspection location.

Notifying Companies House

Companies House should be notified when a shareholder joins or leaves a company. This is the responsibility of the director or company secretary. You must provide the name and date of membership or departure of all new shareholders in Part 4 of the next confirmation statement. You can update the statement before the next one is due, if preferred.

About the author

James Howell

James Howell, Financial Controller of 1st Formations, is the driving force for the company’s financial department and is focussed on the success of the business. Throughout the growth of the business and harking back to his many years of previous experience in accountancy practice, dealing with all types of SMEs, he has developed a keen interest in all aspects of company formation and company secretarial work. In his spare time, James is a father to 2 young children but keeps up strong interests in both music and sport.

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By James Howell