If you are a minority shareholder (with less than 50% of the shares of a company), you may sometimes struggle to have your business interests heard and to have these taken into account when key decisions are being made regarding the company’s strategic direction. It is, therefore, important to understand and defend your legal rights as a minority shareholder.
What rights do minority shareholders have?
Unless specific amendments were made at the time of the company’s incorporation within the articles of association or shareholders agreement, it is most likely that as a minority shareholder, your rights will be confined to those in the Companies Act 2006, which are as follows:
5% shareholding:
- Call a general meeting.
- Require the circulation of a written resolution to shareholders (in private companies).
- Require the passing of a resolution at an annual general meeting (AGM) of a public company.
- Apply to court to prevent the conversion of a public company into a private company;
10% shareholding: call for a poll vote on a resolution.
> 10% shareholding: prevent a meeting being held on short notice.
15% shareholding: apply to the court to cancel a variation of class rights, provided such shareholders did not consent to, or vote in favour of, the variation.
> 25% shareholding: prevent the passing of a special resolution.
What rights do majority shareholders have?
A majority shareholder is one who holds over 50% of a company’s shares and is often the founder of the business (or their descendants). As such, majority shareholders are in a stronger position when it comes to making key company decisions. Their rights include:
> 50% shareholding: pass or block an ordinary resolution
75% shareholding: pass or block special resolutions
90% shareholding: allow short notice of meetings
Pre-emption rights
Under the Companies Act 2006, pre-emption rights allow existing shareholders the ‘right of first refusal’ when new shares are issued. According to 561(1) of the 2006 Act, shares cannot be offered to another person until an offer has been made (on the same or more favourable terms) to each existing shareholder, and any time limit given for the offer has expired.
At its core, this enables such individuals to protect their existing shareholding against further dilution of their shares – but typically in proportion to the shareholding owned.
Minority shareholder protection
Minority shareholders can be further protected beyond their basic rights by making amendments to the company’s articles of association and shareholders agreement.
Desired changes may include enabling those with minority shareholdings to have a say in who is appointed as a director, expanding the range of matters which require the agreement of all shareholders, and being able to consent to board resolutions.
Where feasible, such changes should be made pre-emptively, well before disputes have the chance to arise, and given the need for 75% or more of shareholders to back such as change, this is highly unlikely to occur in the midst of a disagreement.
Adding changes to the company articles or shareholders agreement which afford greater protection to minority shareholders can ensure a great deal of cost, stress, and wasted time is avoided at a later date, should a dispute occur.
Unfair prejudice petition
Under section 994 of the Companies Act 2006, a shareholder can petition for relief where they have reason to believe the affairs of the company are being run in a manner which is “unfairly prejudicial to the member's interests as a member. And an actual or proposed act or omission of the company is or would be so prejudicial.” This may include breaches of fiduciary duty, breaches of the shareholder agreement, mismanagement, or exclusion from management by directors.
Once filed, if the Court is satisfied that the basis for the petition is valid (i.e. that the conduct caused prejudice or harm to the interests of the member and this was unfair), under section 996 of the Companies Act, they may issue an order for any of the following to be carried out:
- Shares of the petitioning member to be bought by other members of the company or by the company itself.
- Seek to refrain the company from taking certain actions
- Bring civil proceedings in the name of the company
- Prevent changes to articles being made
- Petition for the winding up of a company under section 122(1)(g) of the Insolvency Act 1986 (IA 1986).
- Exercise other rights under the IA 1986 and the Companies Act 2006.
Resolving shareholder disputes
For shareholders who wish to avoid traditional litigation methods as a means of resolving a dispute, Alternative dispute resolution (ADR) offers a highly effective option for even the most complex disagreements. ADR includes approaches such as mediation, arbitration, round-table negotiation. The common aspect of all ADR methods is they are non-confrontational and encourage to resolution outside of litigation. And because the involvement of the Courts can be avoided, matters are often resolved without unnecessary stress, time, cost, and importantly can ensure the preservation of relationships between parties.
If you require detailed legal advice on company shareholder matters, please call us on 0161 941 4000 or speak to our shareholder agreement solicitors.