From electing directors to dictating the company's strategic direction, your influence as a shareholder stretches far and wide.
These rights can often be restricted, however, depending on whether you are a minority or majority shareholder and how your rights are documented in the shareholder's agreement and company's articles of association.
Summary of a shareholder's rights
As a shareholder in a limited company (whether a private limited company or a public limited company), you have certain basic rights and obligations. Some of the most common rights include the following:
- Shareholders are usually entitled to participate in and vote on resolution proposed at general meetings.
- They have the right to inspect certain documents at the company's registered office, including directors' service contracts and the company's report and accounts.
- Shareholders can exercise independent judgement on matters such as approving dividend payments by voting on and passing ordinary resolutions and special resolutions.
- They have a say in corporate governance, including the election and removal of a company’s directors.
- Majority shareholders have significant influence but must not act in a way that is unfairly prejudicial to other shareholders.
- Shareholders are usually entitled to receive payment on the winding-up of the company.
- If there is a dispute, shareholders may have recourse to filing derivative claims or unfair prejudice claims.
- Share ownership in a limited company comes with limited liability, protecting shareholders from insolvency proceedings beyond their investment in share capital.
- Shareholders have statutory rights to receive a share certificate and to inspect the company's register of shareholders.
- The rights of shareholders may be further defined by the company's constitutional documents, including its articles of association (which are often the default model articles of association) and memorandum of association.
- A simple majority of shareholders can pass an ordinary resolution, while a special resolution must be voted for by not less than 75% of the company’s shareholders.
If you are unsure of your rights, particularly in the face of a dispute, you can find out how a shareholder dispute solicitor can help.
Understanding shareholder rights
As an investor in a limited company, you are provided with certain protections known as shareholder rights. These protections vary according to whether you hold ordinary shares or preference shares in the company. Preference shares usually give their holder preferential rights in relation to dividend payments and on a winding-up of the company, but carry limited voting rights.
These legal provisions allow shareholders to exercise control over the company to some extent. For instance, shareholders may be entitled to vote on substantial company decisions. The Companies Act 2006 is the primary source of these rights in England and Wales. A company's articles of association, memorandum of association and any shareholders' agreement can further define or limit these rights.
The role of a shareholders' agreement
A shareholders' agreement is a private contract between the company's shareholders.
It usually outlines the rights and obligations of shareholders together with providing procedures for resolving disputes or making changes to the company’s structure. This often includes voting rights applying to the holders of different classes of share and a right to information about the company specific to each shareholder. This can offer an additional layer of protection to shareholders who are not directors of the company.
While it isn't legally mandatory, a well-drafted shareholders' agreement can prevent future disputes by providing clarity. It allows shareholders to customise their rights and obligations to suit their specific needs and circumstances, beyond what is provided for in the Companies Act 2006 and the company's articles of association.
Are you a minority or majority shareholder?
The distinction between minority and majority shareholders is vital, because it significantly impacts a shareholder's influence over the company's decision-making process.
Majority shareholders, who hold more than 50% of the company's shares, have the power to control ordinary resolutions.
On the other hand, minority shareholders, despite holding a smaller proportion of shares, still possess significant rights under English law. They can challenge decisions that they believe are unfair or prejudicial and vote on certain matters, such as the election or removal of directors.
Articles of association and company law
A company's rules for operation are set out in a document known as the articles of association. This document covers areas such as directors’ powers and responsibilities, decision-making as well as the appointment and removal of directors. It also covers the issue and transfer of shares, payment of dividends and other distributions and the organisation of general meetings.
The Companies Act 2006 allows companies to adopt their own articles of association. If they don't, however, they will be governed by the model articles.
Special rights of shareholders
Shareholders possess certain special rights which can significantly impact a company's operations. For instance, shareholders have the right to vote on significant corporate actions, such as mergers or acquisitions.
Under section 303 of the Companies Act 2006, a shareholder or group of shareholders who together represent at least 5% of the company’s voting rights can require the company’s directors to call a general meeting. Shareholders also have the right to propose resolutions and inspect company books and records. If a shareholder believes that the company's affairs are being conducted in a manner unfairly prejudicial to their interests, they can apply to the court for a remedy under Section 994 of the Companies Act 2006.
Dividend rights of shareholders
Dividends represent a share of the company's profits distributed to its shareholders.
The right to receive dividends is one of the most significant financial benefits of being a shareholder.
The payment of dividends is not automatic though. It depends on the company's profitability and the decision of the board of directors, who have discretion to decide whether or not to declare a dividend payment to shareholders.
In some cases, the articles of association or a shareholders' agreement may provide for different classes of shares with varying dividend rights. For instance, preference shares often carry a right to a fixed dividend before any dividend is paid to ordinary shareholders.
Rights on winding up
If a company is wound-up, shareholders have the right to a proportionate share of the company's residual assets after all debts and liabilities have been paid. The distribution of assets on a winding-up can be complicated, especially if there are different classes of shares with varying rights. The company's articles of association and any shareholders' agreement will typically provide for the rights of shareholders on a winding-up.
Shareholder meetings and voting rights
Shareholder meetings are an important aspect of a company's governance structure. They provide a platform for shareholders to exercise their voting rights, voice their opinions and stay informed about the company's affairs.
Shareholders have the right to receive notice of and attend general meetings, including the Annual General Meeting (AGM), where key decisions are made, such as in relation to the approval of the company’s report and accounts, director’s remuneration, the final dividend, appointment of auditors and election of directors. Shareholders do this by voting on resolutions, proposing resolutions and asking questions of the directors.
Voting rights are typically proportionate to the percentage of shares held by a shareholder. A company's articles of association or a shareholders' agreement may provide for different voting rights for different classes of shares.
Transfer of shares
The transfer of shares involves changing the ownership of shares from one person to another. Shareholders have the right to transfer their shares unless restricted by the company's articles of association or a shareholders' agreement.
Restrictions on share transfers are common in private companies to maintain control over who owns that company’s shares. These restrictions may require a shareholder to offer their shares to existing shareholders before selling them to an outsider. Such a restriction is known as a pre-emption right, being a right of first refusal. Another restriction may empower a company’s directors to refuse to register the transfer of shares.
Shareholder liability
Shareholders' liability in a company is typically limited to the amount unpaid on their shares. This means that if the company goes into liquidation, the shareholders will not be required to contribute more than the nominal value of their shares plus any premium agreed to be paid for those shares.
In certain circumstances, a court may decide to pierce the corporate veil, meaning look through the limited liability nature of a company, and hold its shareholders personally liable for the company's debts. This can occur in cases of fraud or improper conduct, such as the concealment of assets in divorce proceedings.
Changes to shareholder rights
Changes to shareholder rights can occur for various reasons, such as the issue of new shares, changes to the company's articles of association or a merger or acquisition.
In accordance with section 630 of the Companies Act 2006, any variation of the rights attached to a class of shares requires the consent of that class of shareholders, typically through a special resolution passed at a separate class meeting. This protection ensures that the rights of a class of shareholders cannot be varied without their agreement.
Shareholder disputes
Shareholder disputes can arise over a variety of issues, such as disagreements over the company's direction, dividend policies or allegations of director misconduct. These disputes can be disruptive and potentially damaging to the company.
The legal process for resolving shareholder disputes can be complex and involve a variety of options. Shareholders can negotiate with each other directly, engage in mediation, or, as a last resort, take legal action. Minority shareholders, in particular, have specific rights under the Companies Act 2006 to apply to the court for relief if they believe the company's affairs are being conducted in a manner unfairly prejudicial to their interests.
A shareholder dispute solicitor can advise you on your options.
Shareholder activism
Shareholder activism involves shareholders using their equity stake in a company to pressure its management into making changes in the way the company operates.
Whilst shareholder activism is more common in larger public companies, even minority shareholders in smaller private companies can use their rights under the Companies Act 2006 to tyr to influence the way a company operates.
Understanding shareholder rights is crucial for anyone investing in a limited company. These rights, governed by the Companies Act 2006 and further defined or limited by the company's articles of association or shareholders' agreement, provide shareholders with control over the company and protection for their investment.
Whether you're a majority or minority shareholder, it's important to be aware of your rights and how you can exercise them. From voting at general meetings to receiving dividends, transferring shares and taking action in the event of a dispute, shareholder rights play a key role in the governance of a company.