Shareholder Rights
Shareholders only have fairly limited rights.
The Rights Of Shareholders
They have no right to participate in the management of the business due to their capacity of being a shareholder.
The basic rights of the shareholders are to attend and vote at shareholder’s meetings, to participate pro rata in the issues of new shares and a right not to be unfairly prejudiced by the conduct of the Company’s affairs.
Further rights may be granted by virtue of any shareholders agreement which has been signed in relation to the Company.
Certain matters can only be carried out with a majority (more than 50%) (ordinary resolution) or by at least a 75% majority (special resolution).
An example of this is the company’s constitution which can only be changed by virtue of a special (75%) resolution.
Voting rights are determined in terms of the number of shares as opposed to the number of shareholders. Complications arise when there is more than one class of shares voting.
It is possible to issue shares which are non-voting and/or which are entitled to a preferential payment of dividend.
5% of shareholders of voting shares can require the directors to convene a shareholders meeting. Shareholder meetings must generally be convened upon at least 14 clear days’ notice. A meeting can (generally) be convened on short notice with the consent of shareholders possessing 90% of the voting rights at the meeting.
It is common for a shareholder to be involved in the company in a different capacity, such as being a director and/or employee.
Shareholder Agreements – Essential Protection
These agreements are normally an essential protection for shareholders possessing less than 50% of the shares in the Company. It is quite common for shareholder agreements to provide for certain matters to be undertaken only with the unanimous consent of all the participating shareholders. Examples include borrowing money over a certain amount, changing the Company’s bank, appointing additional directors or spending more than a specified sum of money upon new plant or machinery. Shareholders agreements also generally make provision for other items such as rights of first refusal upon proposed transfer of shares and separate non-competition obligations on the part of the participating shareholders etc. Our firm does offer to provide (if instructed) in the shareholder’s agreement which we prepare, provision for financial disputes to be resolved (on application by any participating shareholder) by an independent accountant to be appointed at the expense of the Company. Such a provision can be very useful in help avoiding disagreements from affecting the business relationship of the participating shareholders- which could result in damage to the business of the Company. Another alternative is to provide for relevant disputes to be referred for compulsory mediation.
Typical matters covered by a shareholders agreement include:
- How many directors there will be of the Company and how they will be appointed and how many directors each shareholder will appoint.
- Hire of new staff and dismissal of current staff,
- Non-compete covenants and confidentiality covenants on the part of the shareholders between themselves.
- Pre-emption rights in relation to the issue of new shares.
We have precedent shareholder agreements. Such agreements are generally relatively inexpensive to prepare if the precedent is followed. However, if special terms or provisions are required, this can materially add to the cost.
Deadlock Upon The Board Of Directors
This is a relatively common occurrence, where the directors of the company stop co-operating with each other and even potentially stop talking to each other. Urgent professional advice should be sought to resolve such situations.
In extreme situations, such disputes can be resolved by one shareholder being bought out by the other shareholder(s).
Unfair Prejudice
A key protection of a minority (less than 50%) shareholder is the statutory remedy not to be unfairly prejudiced. The relevant legislation is set out in section 994 of the Companies Act 2006, which provides that: “A member of a company may apply to the Court by petition for an order…… on the ground (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or some part of its members (including at least himself), or (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.” These applications are generally very expensive in terms of legal costs to pursue.
The result of the action will often involve the disgruntled shareholder being bought out by the other shareholders without any reduction or discount due to the minority holding held.
Unfair prejudice is a relative difficult area of the law.
Exclusion From Management
This, again is a relatively common situation. A typical example is where a shareholder (in a company which is the corporate equivalent of a partnership) is forcibly removed from the board of directors or where he is not invited to director meetings or meetings of the senior management team of the business. In such a situation, unfair prejudice is a powerful remedy to the shareholder where he can reasonably expect to participate in the management of the business but is excluded from management by the other shareholders.
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