Can I Remove a Shareholder from My Company? Understanding the Legal Requirements and Necessary Precautions

A shareholder can leave without the business closing, but compulsory removal requires legal grounds, evidence, and compliance with the applicable procedure.

One shareholder has stopped participating in operations. Another has begun making decisions that harm the business. The relationship has deteriorated, and the others are asking: can this person be removed from the company?

The answer depends on the obligations undertaken, the conduct involved, and the rules governing the company. Under Brazilian law, limited liability companies have mechanisms for ending a shareholder’s membership while preserving business operations. However, compulsory removal requires more than dissatisfaction among the remaining shareholders.

Does a Shareholder’s Departure Mean the Company Must Close?

Partial dissolution allows the corporate relationship to end with respect to a particular shareholder while the company continues operating.

This departure may arise through different mechanisms, including voluntary withdrawal or compulsory removal. They are distinct: withdrawal is initiated by the shareholder, subject to the applicable requirements, while removal seeks to end their membership against their will.

Before choosing a course of action, it is therefore necessary to understand the problem and the intended outcome.

Does Stopping Work for the Company Justify Removal?

Absence from daily operations does not, by itself, constitute serious misconduct. It is necessary to determine whether the shareholder undertook operational duties and whether a material breach occurred.

An investor, for example, may have no day-to-day responsibilities. By contrast, abandoning expressly agreed duties requires an assessment of the consequences for the company.

It is also important to distinguish shareholder status from a management role. Removing someone from management does not automatically terminate their ownership interest.

The assessment should consider the articles of association, the obligations undertaken, the available evidence, and the effects of the conduct on the business.

Is Loss of Trust Enough?

The expression affectio societatis refers to the willingness to maintain the corporate relationship. When that willingness disappears, continuing the partnership may become difficult.

However, Brazil’s Superior Court of Justice has held that a breakdown of affectio societatis alone does not justify judicial removal. Just cause and the facts supporting it must be demonstrated.

Strategic disagreements, personal incompatibility, or disputes among shareholders should not automatically be treated as serious misconduct.

Conversely, the court has recognized that improperly withdrawing company funds in breach of the law and the articles of association can constitute serious misconduct sufficient to justify removal. The grounds lie in the proven conduct and its seriousness.

Can Removal Take Place Without Court Proceedings?

For Brazilian limited liability companies, Article 1,085 of the Civil Code provides for removal for just cause without court proceedings, subject to requirements including authorization in the articles of association, the statutory voting threshold, and acts of undeniable gravity that jeopardize the company’s continuity.

As a general rule, a specially convened meeting is required, with timely notice to the shareholder concerned and an opportunity to present a defense. The law provides a specific exception for companies with only two shareholders.

Judicial removal is another available route in the circumstances established by law.

The choice between these routes depends on the ownership structure and the facts of the case. A contractual provision does not authorize arbitrary removal.

Does a Removed Shareholder Lose the Value of Their Ownership Interest?

Removal does not automatically extinguish the right to have the value of the ownership interest assessed and settled.

The contractual valuation provisions must be examined. If the articles of association are silent, Brazil’s Code of Civil Procedure provides that judicial valuation must use an asset-based valuation balance sheet, taking tangible and intangible assets and liabilities into account as of the relevant date.

The amount therefore does not necessarily equal the initial investment or a percentage of revenue.

Payment terms must also comply with the articles of association and applicable law. Any losses allegedly caused by the shareholder require a separate assessment.

How Can the Articles of Association Help Prevent Disputes?

Well-drafted articles of association can define responsibilities, provide for removal for just cause, and establish valuation and payment criteria. These provisions must comply with the law.

When a dispute already exists, legal counsel can help organize evidence, assess alternatives, and conduct the appropriate procedure.

The objective is to resolve the breakdown while preserving operations and the rights involved. Removing a shareholder requires legal grounds, documentation, and planning so that the solution does not become a new problem for the company.