Shareholder Rights – Standing Up For Minorities

With shareholder power almost always linked to the number of shares held, we explain the importance of not discounting your minority shareholders.

It’s all too easy to assume that small, or minority, shareholders are unable to exercise any significant influence within a company at all.  In fact, given the limited statutory rights granted to minorities, and the practice of discounting the value of a minority interest, it is easy to see why such a perception exists.

But whether this is the case or not, it would be foolish for directors or majority shareholders to disregard the interests of minorities out of hand.  Parts of the Companies Act 2006 grant specific and valuable rights to all shareholders, irrespective of the size of their shareholdings.

A good starting point is to consider exactly how minor the minority shareholder is.  Arguably, a minority shareholder is one that is unable to pass an ordinary resolution without the assistance of any other person, and on this basis, a holding as large as 50% could be deemed to be a minority interest. 

That said, if shareholder power is viewed from the perspective of what it permits a shareholder to prevent happening rather than from what it permits the shareholder to do, then minority interests do matter.  The same 50% shareholding that could not single-handedly pass an ordinary resolution is certainly sufficient to block an ordinary resolution taking effect.  If your stake amounts to more than 25% then this is enough to block a special resolution.

A holding of more than 10% will block a general meeting taking place at short notice, and with more than 5% then your rights extend to requiring the company to hold a general meeting and circulating a written resolution.

Even if you only own a fraction of the entire issued share capital then you are not left without rights.  Provided that the rules have not previously been disapplied, the statute states that if a company plans to issue new shares, all shareholders must be offered the right to participate so that their own holding is not diluted.  Although this right in itself is only of marginal significance for a very small shareholder, it is valuable if you are more substantial.

Every shareholder has the right to be notified of general meetings and upcoming resolutions, although whether they choose to attend or vote remains a personal choice.  In terms of reporting requirements, every shareholder has the right to receive annual accounts.

Even though a minority shareholder may be unable to muster sufficient power, they are not entirely without remedy if the company acts in a way adverse to their interests.  Every shareholder has the statutory right for the company not to act in a way that would be unfairly prejudicial to their interests as a shareholder.  So if the directors are in breach of their duties, there has been serious mismanagement or any other activity which causes a shareholder to be aggrieved, they are not left without rights.

Realistically, it remains the case that for most limited companies the amount of power a shareholder carries will be linked to the amount of shares held.  For many individuals, this is an unsatisfactory position.  Often this is discovered too late, but it reinforces the need to enter into a comprehensive shareholder agreement to give individual shareholders greater rights than they would otherwise be entitled to under statute. 

MORE INFORMATION 

If you have more questions relating to shareholder rights, either as a majority or minority shareholder, do not hesitate to seek specialist advice from Pinney Talfourd’s commercial department – email us by using the form to the right.This article was written by Edward Garston, a company commercial solicitor at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of July 2017.