A Shareholder Has Stopped Responding: Can Your Company Still Make Decisions?

One of your shareholders has stopped replying.

Emails go unanswered, calls are not returned and they are no longer participating in company decisions. But they have not sold their shares or formally left the company.

Meanwhile, the business still needs to operate. There may be contracts to approve, stock to issue, investors coming in or other decisions that need to be made.

So, can everyone else simply move ahead without them?

Sometimes. But a shareholder going silent does not usually mean their rights disappear.

Unlike the position under a single national companies statute, US corporate governance rules are largely state-based. Whether the corporation can still act may depend on its state of incorporation, as well as its charter, Corporate Bylaws and any shareholder or stockholders agreement.

Does Someone Stop Being A Shareholder If They Stop Responding?

No. A shareholder does not generally stop owning their shares simply because they stop communicating with the company.

Their voting and other rights usually remain in place unless their ownership is formally changed.

The more useful question is whether the company actually needs that shareholder's participation for the decision it wants to make.

Does The Decision Actually Need Shareholder Approval?

Not every company decision needs to go to the shareholders.

Many decisions can be made by the board of directors, while others require shareholder approval. The corporation's governing documents may also give shareholders additional consent rights over particular matters.

If the board can validly approve the decision, an unresponsive shareholder may not prevent the company from moving forward at all.

If shareholder approval is required, however, the company needs to check the applicable notice, quorum and voting rules. Sprintlaw's Shareholder Consent Checklist goes into those approval mechanics in more detail.

Do You Still Need To Give Them Notice?

A shareholder going silent does not generally mean the company can simply leave them out of the meeting or approval process.

Meeting notice requirements can come from state corporate law as well as the corporation's bylaws and other governing documents.

The important distinction is that properly giving notice and getting a shareholder to participate are two different things.

If the company follows the applicable notice requirements and the shareholder still chooses not to engage, the next question is whether the corporation can validly proceed without them.

What If They Do Not Attend The Meeting?

This is where quorum becomes important.

Quorum is the minimum amount of voting power that needs to be represented before a shareholder meeting can transact business.

The exact rule depends on the state of incorporation and the corporation's governing documents.

For example, under Delaware law, unless the certificate of incorporation or bylaws provide otherwise, a majority of the shares entitled to vote generally constitutes quorum at a stockholder meeting. Delaware law also allows the governing documents to set a different quorum within statutory limits. 

So an absent shareholder does not automatically stop the meeting. The real question is whether enough voting power is still represented to satisfy the applicable quorum requirement.

Does It Matter How Many Shares They Own?

Yes.

If an unresponsive shareholder owns 10%, the remaining holders may still have enough voting power to establish quorum and approve the decision, depending on the applicable state law and governing documents.

If they own 60%, the position could be very different.

But percentage ownership is not everything. A minority investor might hold a separate class of stock, negotiated veto rights, board appointment rights or contractual consent rights that make their participation important even if their overall ownership percentage is relatively small.

The position can also become especially difficult in a 50/50 corporation. One shareholder going silent may leave the other without enough voting power to approve the relevant action.

Depending on the governing documents and state law, prolonged non-participation can create a deadlock even though the shareholders are not actively voting against each other.

Can You Use Written Consent Instead?

Sometimes.

Many states allow shareholders to approve certain actions by written consent without holding a meeting.

In Delaware, for example, section 228 of the Delaware General Corporation Law generally allows an action to be approved by shareholders holding at least the minimum number of votes that would have been required at a meeting, unless the certificate of incorporation provides otherwise. 

That means a minority shareholder going silent may not necessarily stop the corporation from acting if the remaining shareholders already have enough voting power.

But this is not a universal US rule. The corporation's state law, charter, bylaws and shareholder agreement should be checked before relying on written consent.

What If They Are Also A Director?

In a closely held company, the unresponsive shareholder may also sit on the board.

These are separate roles.

Their absence as a shareholder may affect shareholder votes and meetings, while their absence as a director can separately affect board quorum and board approvals.

This is another reason to identify who actually has authority to make the decision before assuming the company is stuck.

Can You Take Their Shares Back Because They Have Gone Silent?

Usually not simply because they are no longer responding.

Whether the corporation has any right to repurchase, redeem or require a transfer of the stock will depend on the governing documents, stock terms and applicable state law.

If the real issue is removing an inactive shareholder from the cap table rather than making a decision without them, that is a different question. Sprintlaw's guide on what happens when a founder leaves but still owns equity explains that issue in more detail.

Similarly, issuing more stock simply as a way of diluting an unresponsive shareholder should not be treated as an easy workaround. A stock issuance can raise separate questions around board authority, fiduciary duties, investor rights and the corporation's governing documents.

What Should You Do If Their Silence Is Holding Up The Company?

If a shareholder has stopped responding, start with the decision the company actually needs to make.

Check whether it belongs to the board or shareholders, what state law applies, and what the charter, bylaws and any shareholder agreement require.

Then look at whether the necessary notice, quorum and voting requirements can still be met.

In some cases, particularly where the unresponsive shareholder holds a smaller percentage, the corporation may still be able to move forward. In others, their voting power or special consent rights can create a genuine roadblock.

If that is starting to delay important decisions, reviewing the Corporate Bylaws together with the shareholder agreement and other governing documents can help establish what the corporation can still do and what options may be available if the normal process no longer works. If you would like help with this, you can reach us at (888) 449-8437 or team@sprintlaw.com for a free, no-obligations chat.