A Guide to Shareholder Rights in the UK
Articles of Association and shareholders’ agreements will deal specifically with shareholder rights. Different shareholders can often have different rights, and this is usually affected by a company having different classes of shares. The rights are detailed in the articles. If you have a well drafted shareholders’ agreement dovetailing with a well drafted set of articles of association then shareholder positions can be protected. As detailed below, without these, your position as a shareholder may not have the protection you think.
Often shareholders believe if they are a majority shareholder that their position is protected and that they hold the power. Individuals may think that a 51% holding against 49% is key. This is not the case.
With such a majority holding you can only pass an ordinary resolution. What can you do with an ordinary resolution? Well probably the most significant are the appointing or removing of directors, approval of a final or interim dividend, approving loans or substantial property transactions with directors, reappointment of auditors and increasing the authorised share capital . Aside from that there is little you can do.
What are the rights of each shareholder?
The most powerful shareholder percentage is 75%. With this shareholding you can pass special resolutions. Special resolutions approve matters such as amending the articles of association, reducing the company’s share capital, allowing the company to buy back its own shares (in certain situations), changing the company’s name and winding the company up (to name but a few). Obviously the 75% threshold can be reached by an individual shareholding or sometimes through a group of shareholders with a common view grouping together.
Anyone holding more than 25% of the shareholding can block any special resolutions. Whilst such a holder cannot have significant direct effect on the Company by passing resolutions, the fact that they can block special resolutions puts them in a very strong position.
Any shareholder, particularly minority shareholders should look to bolster their protections through a shareholders’ agreement and articles of association. A shareholders’ agreement will contain a list of reserved matters which require the consent of a certain percentage of shareholders. This consent level can be set at unanimous consent thereby meaning even a minority shareholder will need to give approval before any action can be taken on those matters.
Why minority shareholders need an agreement
Examples of minority shareholder protection would be ensuring that the articles of association and shareholders agreement contain power of veto to block certain action unless the minority shareholder consents eg veto in relation to sales and mergers, expenditure above prescribed limits, new investment. It is also important that tag along provisions are included so that if the majority shareholders are to sell then the minority shareholder is able to ‘tag-a-long’ on the same terms.
If a decision is thought to be unfairly prejudicial to minority shareholders, a shareholder may bring an “unfair prejudice” claim. There is no minimum shareholding level for bringing such an action. No limitation period applies to a petition for the relief of unfairly prejudicial conduct. However, the court has discretion on whether to grant relief
Whatever your percentage shareholding it is important that you know your rights and have the appropriate protections in place.