Are you already a shareholder in a company or plan on becoming a shareholder or are you planning on issuing shares in your company to a key employee? Whatever your situation, it will always be beneficial to understand what your rights and powers as a shareholder are or will be.
Where can I learn what my shareholder rights are?
Shareholder rights and powers for both minority shareholders and majority shareholders can generally be found in a company’s constitution, a shareholders’ agreement and/or the Companies Act 1993 (the “Act”).
The company’s constitution
The company’s constitution (which is available for public inspection) encompasses a comprehensive set out rules, regulations and procedures by which a company will be governed and the respective powers and responsibilities of the directors and shareholders. The constitution will bind the company and its shareholders as if there were covenants given by each of them to the other to observe those provisions.
The constitution is therefore a key document that all shareholders in a company should be familiar with. However, having a constitution is not a compulsory requirement for a company and in the absence of such, the provisions of the Act will apply.
Shareholders’ Agreements
Where there are a small number of shareholders in a company, it is often prudent to have a shareholders’ agreement. A shareholders’ agreement is a contractual agreement between shareholders, which is separate from the constitution.
The advantages of a shareholders’ agreement are that it is a private document and so not available to the public and it can protect some of the shareholders’ interests in ways that cannot otherwise be easily achieved (for example, where there are different classes of shares).
As a contractual agreement, it is easier for one person to enforce their rights against another under a shareholders’ agreement rather than relying on the constitution, and if correctly used, a shareholders’ agreement can often improve the position of a minority shareholder and provide veto powers for certain proposals.
Companies Act and Shareholder Decisions
Whilst the directors are responsible for the day to day management of a company, shareholders can quite often be able to exert a significant amount of influence if they are able to correctly exercise their rights and powers. Certain decisions for running the company can only be made subject to shareholder approval. Only the votes of those entitled to attend the meeting and vote on a particular decision are counted. As it is often one vote per share held, the percentage of shares can hold far more significant power and whilst the shareholding levels can be used to vote in favour of certain decisions, it can also be used to block certain decisions.
The table below provides a brief overview of some of the key rights which are afforded to shareholders of private limited companies under the Act.
| Percentage of shares with voting rights | Rights they provide/consequences of ownership |
| Over 0% | Right to request information held by company
Right to request a copy of the financial statements prepared for tax purposes Right to vote at shareholders’ meetings |
| 5% and over | Right to call for a shareholders meeting
Require the company to have financial statements audited by a qualified auditor |
| Over 25% | Can block a special resolution |
| Over 50% | Can block an ordinary resolution
Can appoint a director and remove a director |
| 75% and over | Right to circulate a written resolution
Can pass a special resolution including:
|
| 95% and over | For a large company, can pass a resolution for the company to opt out of preparing an annual report for the relevant accounting period |
| 100% | If all entitled persons have agreed or concur then:
|
This table is not an exhaustive guide to all shareholder rights and highlights those which are likely to be most relevant to shareholders in small to medium sized companies. The percentage thresholds are as set out in the Act, but some thresholds can be altered, by the company’s constitution or a shareholders’ agreement. When considering shareholders’ rights, the table should therefore be considered in conjunction with the company’s constitution and/or a shareholders’ agreement.
Pre-emptive rights
Many shareholders are not aware that under the Act, there are certain rights which will protect their proportionate interest in a company from being diluted. Often referred to as pre-emptive rights, any offers to allot shares must firstly be made to existing shareholders in the proportions in which they own the company’s shares.
Minority buyout rights
Also worthy of mention is s111 of the Act which affords to shareholders who dissent to specific special resolutions (namely adopting or amending the constitution which alters or removes a restriction on the activities of the company, approving a major transaction or amalgamation) a right to require the company to purchase their shares at a fair and reasonable price. The minority buyout right under the Act has its limitations and shareholders will often be better protected by including express buyout rights in the company’s constitution or a shareholders’ agreement.
Often referred to as ‘drag along rights’ (which empower majority shareholders to buy out minority shareholders) and/or ‘tag along rights’ (which are often triggered when a majority shareholder sells their shares but provides minority shareholders with some protection by requiring the shares of the minority shareholder to also be purchased and therefore offering a viable option for a minority shareholder to exit the company entirely).
Unfair prejudice to minority shareholders
Minority and majority shareholders alike, should be aware of the right available to minority shareholders to bring an unfair prejudice claim. An unfair prejudice claim typically arises when majority shareholders, who are often the directors, use or abuse their powers to promote their own interests to the detriment of the minority. S174 of the Act allows a shareholder to apply to court for relief based on the company’s affairs having been conducted in a manner that is “oppressive, unfairly discriminatory or unfairly prejudicial” to the shareholders. Once such conduct is established, there are various remedies that a Court may order including requiring the company to buy the shareholder’s shares, pay compensation or setting aside the action taken by the company. Bringing an unfair prejudice claim has its challenges and having a comprehensive shareholders’ agreement will put shareholders in a much better position than having to deal with lengthy and costly unfair prejudice claims later on.
