Shareholders rights

Shareholders rights

What rights do shareholders have under company law?

The Companies Acts don’t have a lot to say about shareholder rights and this means that minority shareholders are well advised to seek to negotiate either alterations to the company’s articles of association or a shareholders agreement to bolster their shareholders rights. Another option with a company with a number of shareholders is to act in concert with other minority shareholders with a view to creating a large enough proportionate shareholding to block general or special resolutions.

Put simply, a shareholder owning 75% or more of a company’s shares, based on standard articles of association, has total effective control of a private limited company. Whilst a minority shareholder can apply to the courts under the Companies Act on the basis of an unfair prejudice application, these applications are expensive and difficult and the conduct of the controlling shareholder(s) has to be something more prejudicial than simply operating the company more for their benefit than that of the minority.

In company law, all shareholders have certain statutory rights, which are limited, including :-

The right to receive a share certificate

  • The right to vote at general meetings
  • To be given 14 days prior written notice of a general meeting
  • The right to appoint a proxy to attend a meeting
  • To receive dividends if the company declares a dividend
  • The right of inspection of  company registers, including directors and shareholder registers
  • Inspect company records and general meeting minutes
  • Inspect director service contracts
  • To inspect the company’s annual accounts

Blocking rights and total control rights

  • With a shareholding of 5% or more, shareholders can  call a general meeting and can make an application to Department for Business, Innovation and Skills to have the company investigated.
  • A 25% shareholding enables a shareholder or group of shareholders to block the passing of a special resolution
  • A shareholding of 50% or more will enables shareholders to pass ordinary resolutions, which comprise the majority of day to day strategic decisions.
  • If you or a group of shareholders have a 75% shareholding or greater, you can pass general and special resolutions at general meetings. This is significant because special resolutions can include changing the company’s articles of association and that means changing almost everything about the way the company operates.

Minority shareholder application based on Unfair Prejudice

We should start by emphasising that claims for unfair prejudice are difficult to succeed with and as with any form of litigation, the inherent risks, costs and uncertainty should mean that significant financial interests are at stake to make such litigation worthy even embarking on.

Types of conduct which can be unfairly prejudicial in law are :

  • Being excluded from management in circumstances where there is a legitimate expectation of participation;
  • diverting business to another company in which the majority shareholder has an interest;
  • where majority shareholders use the company exclusively for their own financial benefits, perhaps ensuring that there are no dividends payable to minority shareholders
  • general abuse of power or breach of the company’s Articles of Association such as failing to hold AGMs, delaying accounts or depriving shareholders of information about the Company.

For more information or assistance with shareholders rights, get in touch for a free initial discussion.