How Do You Remove a Member, Shareholder, Director, or Officer from Your Company?
A common question from many of our clients, or potential clients, is, “How do I remove someone from my company?” Such a common question does not necessarily have an easy answer, to their dismay. The are two possible scenarios – a company with governing documents that detail how the removal is done and a company that does not have these governing documents (or their governing documents do not have the proper mechanisms for the removal).
With Proper Governing Documents
If the company has an operating agreement for an LLC, or by-laws for a corporation, or other governing documents, there may very well be mechanisms for the removal of owners in there. If that is the case, the mechanisms just need to be followed for the removal. Typically, a vote is going to be required, and a fair market value will need to be paid to the owner. The payment terms may be included in the governing documents, or they may need to be decided on by the company and departing individual.
Without Proper Governing Documents
However, many companies do not have an operating agreement or bylaws, or they have those documents, but they do not contain the mechanisms for the removal of owners. Unfortunately, many companies only have articles of incorporation for a corporation or articles of organization for an LLC and have never drafted by-laws or an operating agreement. Therefore, the default rules would simply be the state statutes. Instead of waiting until there is a dispute between members, shareholders, directors, or officers, companies need to anticipate discourse and plan by including these provisions in by-laws or an operating agreement early on.
Governing documents dictate the rights and responsibilities of each business owner and it documents the agreement in a written contract. Since these are legally enforceable contracts, it makes since to have an attorney draft governing documents that best meet your needs.
I have seen many situations in which a company fires an employee, but the ex-employee is still a shareholder, director, and/or officer. Or, the company may try to remove a person’s stock ownership, but the person is still a director or an officer. These can be tricky situations that result in unforeseen circumstances due to the poorly drafted governing documents. Oftentimes, the statutes may have the mechanisms in place for these situations, but the governing documents, if they exist, may not. Or the governing documents could be contradictory.
However, there are ways to avoid these kinds of situations if you act early before any dispute, but what happens if the dispute has already arisen? If that happens, a lawsuit may be necessary to remove the person. Or, if you do remove the person, the company could be looking at a lawsuit for improper removal. You do not want either of those scenarios.
Lawsuits will be awfully expensive; therefore, it is best to have the business documents prepared correctly ahead of time. You may spend more money up front in the beginning, but, in the long run, you will save yourself a lot of money and headaches. If you do not have the correct documents, it is better to make an appointment with Law 4 Small Business before a dispute does arise, or, if you anticipate a dispute, get the documents sorted out and revised immediately.
We have had the unique opportunity to examine a broad spectrum of businesses across several industries. Nearly all failed or failing businesses are “making it up as they go along.” They have no business plan, never had a business plan, and simply rushed into a market space that looked favorable at the time.
Law 4 Small Business can help you avoid these situations by reviewing all your documents, modifying existing documents, or even preparing new ones, but, if you find yourself in the situation where you are already trying to remove a business partner and your governing documents just are not up to snuff, be sure to give us a call to discuss how to proceed right away.