Concept for - Shareholder Rights: Actions Against Directors

Elon Musk recently found himself on the receiving end of a lawsuit in the US State of Delaware to reverse a $55.8bn (£44bn) pay deal he was due to receive from Tesla.

In this case, the directors of Tesla had made a decision to award a significant pay out to Elon Musk. One of the company’s shareholders disputed this decision. The case proceeded to trial and the judge found in favour of the shareholder. It was found the shareholders were not fully informed of the pay package and as a result the judge annulled the pay deal.

The lawsuit was filed by a Tesla shareholder under the legal jurisdiction of the State of Delaware but would the courts of England & Wales have decided the claim differently?

Company Law in England & Wales

This is an interesting case and emphasises the importance of shareholder rights within a limited company.

Shareholders have certain rights they can deploy if they consider the decisions of the company’s directors and executives are wrong or harmful to the company or their shareholding. Examples of such rights include: a legal challenge (as in the case of Elon Musk), proxy voting and class action lawsuits. In the UK, we also have regulatory bodies such as the Financial Conduct Authority (FCA) who shareholders can report any concerns to.

Shareholders holding 75% or more can direct the Board of Directors to take certain actions. Shareholders with at least a 5% share can require directors to call a general meeting and put certain resolutions to a vote.

If, for example, the Board of Directors had made a decision to pay out a large sum of money, shareholders with less than 75% would be entitled to call a general meeting to potentially challenge the decision or obtain an explanation from the directors as to why the pay out was to the benefit of the company and its shareholders.

Of course, there are other shareholder rights and factors that influence these rights, but on this basis, if the case involving Elon Musk was to have happened in the UK, there is a high chance the court would come to the same conclusion and have made a similar order to the US judge.

Shareholder Rights

In England & Wales, shareholder rights are derived from the Companies Act 2006, t Articles of Association and a Shareholders’ Agreement (if one is in place). While all shareholders have some basic rights, others are applicable only to shareholders who own a certain percentage of the shares in the company.

All shareholders have the right (under the Companies Act 2006) to:

  • Inspect the register of members provided it is for a “proper purpose” (s.116);
  • Inspect records of resolutions and minutes (s.358);
  • Inspect directors’ service contracts (s.229);
  • Bring a claim against a director (s.260);
  • Attend general meetings (s.310);
  • Vote at general meetings (subject to the rights attached to the class of shares held) (s.284);
  • Demand a poll vote (however this right can be restricted by the company’s Articles of Association) (s.321);
  • Appoint a proxy to attend and vote at general meetings on their behalf (s.324); and
  • Receive a copy of the company’s annual accounts (s.423).

If you wish to discuss anything covered in this article, please contact our Commercial Dispute Resolution team.

This article was written by Richard Slater, partner and Christopher Jackson, paralegal apprentice in our Commercial Dispute Resolution team.