Understanding How Founders and Shareholders Can Be Forced Out of Companies

The Role of Shareholders in Company Control

Shareholders play a crucial role in the governance of a company. They are the ones who elect the board of directors, which in turn decides who holds the CEO position. This system of checks and balances is designed to ensure that the company is run in the best interest of its shareholders. However, it also means that even founders can be forced out if they do not hold a controlling stake.

Steve Jobs' experience with Apple is a prime example. Despite being a co-founder and the driving force behind the company, Jobs controlled only around 11% of Apple's shares at the time he was ousted as CEO. The board, driven by the interests of the shareholders, made the decision to remove him. Although Jobs sold all but one of his shares in anger, he was not legally compelled to do so. This highlights the complex dynamics between shareholders, the board, and company leadership.

The Importance of Controlling Shares

Founders often do not own all of their company due to the need for external investors. These investors provide the necessary capital for growth but also gain a say in how the company is run. If a founder grows a company without outside investors, they can maintain full control and cannot be forced out as CEO. However, this is a rare scenario in the competitive business landscape.

Controlling more than 50% of the votes in a company generally makes it impossible to be removed. This is because the majority shareholder has the final say in critical decisions, including the appointment and removal of the CEO. For example, Ray Kroc was able to pressure the McDonald's brothers into selling their shares by purchasing the land their restaurants were on, effectively gaining control of the company.

Legal Mechanisms for Forced Buyouts

Shareholder agreements often contain clauses like drag-along or buy-sell clauses, allowing majority shareholders to force minority shareholders to sell their shares. Without these specific clauses, shareholders cannot be forced to sell their shares. However, in situations where a company is failing, shareholders may be pressured to sell their shares or accept other terms to save the company.

In publicly traded companies, a process called a "squeeze out" can legally force minor shareholders to sell their shares at market price. A squeeze out usually requires the shareholder to own 10% or less of the company. Most countries have legal provisions for forced buyouts in their stock laws. For instance, in Norway, a majority shareholder holding more than 90% of the stock can force a buyout.

Conflicts and Fiduciary Duties

Laws also allow forced buyouts in cases of serious and permanent conflicts of interest between majority and minority shareholders. The term "force out" does not necessarily imply legal compulsion but can involve significant pressure and deal-making. Shareholders can face lawsuits for not fulfilling their fiduciary duty if they refuse deals that could save a failing company.

The mechanisms for forcing shareholders out can vary significantly between different countries. These legal frameworks are designed to balance the interests of all parties involved, ensuring that the company can continue to operate effectively while protecting minority shareholders from exploitation.

Navigating the Complex Landscape

Understanding the dynamics between founders, shareholders, and company control is crucial for anyone involved in the corporate world. The balance of power can shift quickly, and the mechanisms for forcing shareholders out are complex and varied. Whether you are a founder looking to maintain control or a shareholder seeking to protect your investment, being aware of these factors can help you navigate the intricate landscape of corporate governance.