When holding shares in a company, it is vital that the shareholder fully understands what legal rights those shares carry as certain share percentages carry different powers.
If a shareholder has a minority shareholding (i.e. usually less than 50% of shares in a company that have voting rights attached) then the following legal rights will apply:
- more than 25%: a shareholder with this minority shareholding can block special resolutions e.g. adopting new articles of association or changing the company’s name;
- 15% or more: can apply to court to object to a variation of share class rights;
- 10% or more: can demand a poll vote at a general meeting;
- 5% or more: a shareholder is able to require circulation of a written resolution and can require a general meeting to be held.
Having a majority holding of 75% or more of the shares in a company evidently puts that shareholder in a stronger position as they can pass special resolutions. In the eyes of company law, this is an important threshold to attain. With a majority of over 50% shareholding, they are able to pass ordinary resolutions such as (i) authorising the directors to allot shares (other than if there is one class of share, as this is authorised under company law), and (ii) appointing and/or removing directors.
Generally, all shareholders of a private limited company are entitled to inspect records of minutes of board meetings and copies of all shareholders’ written resolutions. They are also entitled to receive notice of general meetings and copies of the company’s report and accounts.
As statutory rights will only afford a minority shareholder with limited protection, a minority shareholder should attempt to supplement their statutory rights with contractual protections in a shareholders’ agreement or in the Articles of Association of the company. Whether this is achievable or not will depend solely on the negotiating power of the minority shareholder. This is to ensure they have a degree of control and that they are in a position to protect their shareholding.
Protecting your minority rights
Examples of contractual protections which could be sought by a minority shareholder are as follows:
- ensuring there is a list of reserved matters which require the consent of all of the shareholders (as opposed to attaining a majority, such as 75%) before any action can be taken on certain matters;
- reserving the right to appoint a director;
- ensuring the consent of all directors is obtained before a board resolution is passed;
- requiring the minority shareholder’s appointed director to be present at board meetings in order to form a quorum;
- requiring the minority shareholder to be present at general meetings in order for there to be a quorum;
- including “tag-along” rights requiring the majority shareholder(s) to include the minority shareholder’s shares in any sale to a third party and on the same terms; and
- pre-emption rights requiring:
- shareholders to offer their shares to existing shareholders before they can transfer them to a third party; and
- newly allotted shares to be first offered to existing shareholders before they are allotted to a third party.
Regardless of the percentage of shares you hold, you need to make sure that you have a shareholders’ agreement in place which details how key decisions of the company are made and it is also an opportunity for a minority shareholder to rebalance power in favour of their interests. Shareholders’ agreements generally address issues such as how shares can be sold, what happens if a shareholder dies, whether shareholders can work in competition with the company when they leave and if compulsory share transfers should take place if a shareholder has acted in contravention of the shareholders’ agreement.
In our next article, we will look in more detail at the rights that all shareholders have in a private limited company.