UK: Rights of the Minority Shareholder

Last Updated: 22 September 1999

You either hold or are thinking of taking a minority stake in an English limited company. You are concerned to ensure that you have the ability to protect your interest in that company.

What rights will your minority stake automatically entitle you to? What further rights might you consider asking for from the majority shareholders? What remedies are available if the affairs of the company are being run contrary to your interests?

This note should help to make you aware of your rights.

Rights in the Articles of Association

You should always check the company's Articles to see what, if any, protection they afford you. The Articles are a contract between the company and each member and between the members themselves and you can bring an action against the company or the other shareholders if they act in breach of the Articles. The Articles for each company vary but you may, for example, find some protection against:

  • being diluted by issues of new shares without the shares first being offered to you;
  • transfers of shares without the shares first being offered to you;
  • the company exceeding borrowing limits set out in the Articles.

Rights of every Shareholder

There are certain, rather limited, statutory rights to which you are entitled regardless of how many shares you own. You are entitled to receive a copy of the audited accounts of the company, to inspect the register and index of shareholders and to inspect and take copies of the minute books relating to shareholders' meetings.

Also, unless the Articles of Association of the company state otherwise, you are entitled to receive notice of each shareholders' meeting and to attend and vote at those shareholders' meetings.

It is also now possible for a private company to elect to opt out of some of the more basic company law requirements. For example a company may elect to dispense with the laying of its audited accounts before a general meeting, elect to dispense with the holding of annual general meetings or elect to dispense with the re-appointment of its auditors each year. Such elections were introduced principally to allow smaller companies to avoid some of the more costly and inconvenient administrative procedures. However, such elections are not intended to prejudice the rights of shareholders and accordingly such elections cannot be made if you disagree and, whatever the level of your shareholding, you also have certain rights to require a company to recommence such procedures. As a result, where the relevant opting-out election is in place you may:

  • require the audited accounts to be laid before a general meeting of the company, by notice in writing to the company within 28 days of receiving such accounts;
  • require the company to hold an annual general meeting, by notice in writing to the company not later than three months before the end of the year in which the annual general meeting is to be held;
  • propose that the appointment of the company's auditors be terminated, in which event the directors must call a shareholders' meeting to consider that proposal and that meeting must be held within 28 days.

Rights of a 5% plus Shareholder

If a company gives notice to you of a shareholders' meeting and you feel that you have not been given sufficient details of the business being dealt with at that meeting then, if you hold at least 5% of the voting rights of all members, you can require the company to send to each of the shareholders a statement giving further details. In practice this right does not have great value as the statement may be quite short (and cannot exceed 1,000 words).

Also, if you hold at least 5% of the shares in a company you may prevent the company from holding meetings on short notice, which for companies with a limited number of shareholders often makes holding shareholders' meetings considerably more convenient. Meetings usually require 14 days or 21 days notice to be given to shareholders (depending upon the type of business being transacted), so the right to require full notice to be given can cause some unwanted delay.

Rights of a 10% plus Shareholder

If you, together with at least one other shareholder, hold at least 10% of the shares in a company, you may call a shareholders' meeting. In practice, however, since you hold a minority of the shares you will not be able to get matters passed at that meeting so this right is of nuisance value only.

If you hold shares in a company which give you at least 10% of the total voting rights of all shareholders you may also demand that decisions in respect of any particular business at a shareholders' meeting be taken by way of a poll rather than on a show of hands. This means that the number of shares, and associated number of votes, held by each shareholder will be the determining factor rather than simply the number of shareholders voting for or against that resolution. Again, however, this is of little use since your votes will be in the minority.

Under certain circumstances as a 10% plus shareholder you may be able to prevent the sale of the whole of the company, as a purchaser will not be able compulsorily to acquire your shares.

Rights of a 15% plus Shareholder

The principal extra right of any person holding at least 15% of shares in a company applies where the share capital is split into two or more classes. For example "A" ordinary shares and "B" ordinary shares are quite common for joint venture companies or a company may have both ordinary shares and preference shares.

Any proposed variation of the rights of any particular class of shares usually requires the consent of persons holding 75% of the shares of that class (either in writing or of persons attending a class meeting). Whilst a 15% holding might not enable you to block the proposal (although it could if attendance at a class meeting was low), you are entitled to apply to court within 21 days of the written consent or class meeting to object to the proposed variation of your class rights. The court will disallow a variation if it considers that the variation would unfairly prejudice the members of that class. Whilst you would only make an application to court in extreme circumstances, the ability to threaten such an application can often prove useful and you could always withdraw the application later.

Rights of a 25% plus Shareholder

Holding more than 25% of the shares (and associated voting rights) in a company gives you significant rights to block certain proposals. For example any of the following resolutions could not be passed without your consent:

  • to alter the Articles of Association of the company;
  • to wind-up the company voluntarily;
  • to change the name of the company;
  • to approve financial assistance to be given by the company to a purchaser or proposed purchaser of some of its shares;
  • to reduce the share capital of the company;
  • for the company to re-purchase or redeem any of its shares;
  • to disapply the statutory pre-emption provisions (if the company's Articles do not already disapply them) which require new shares which are being issued for cash first to be offered pro-rata to existing shareholders (giving shareholders a chance not to have their shareholding diluted).

So whilst a 25% shareholding will not of itself give you any positive rights it will allow you to have a deciding vote on certain more fundamental matters relating to the company.

Shareholders Agreements

As you will have seen from the above, holding anything less than a majority of the shares in a company does not by itself give you significant rights in the running or control of that company. So, if you are intending to take a minority interest in a company you may want to consider further protection by persuading the other shareholders (and often also the company) to enter into a shareholders agreement.

Whilst there are no set rules as to what should or should not be contained in such a shareholders agreement you may want to cover the following points:

  • being given a right to further, regular information concerning the company and its business (for example monthly or quarterly management accounts);
  • being given the right to appoint a director (often yourself) and that director not being capable of being removed without your consent;
  • each shareholder agreeing not to sell any of his shares either (i) without first obtaining the consent of the other shareholders or (ii) without first offering the shares to the other shareholders at the price at which he is proposing to sell them;
  • certain transactions not being allowed to be carried out without your consent (this might, for example, include acquiring other companies or businesses, changing the business of the company, entering into joint ventures or partnerships, making any purchases or disposals above an agreed level or materially changing employment terms for employees or directors);
  • an agreed policy between you and the other shareholders as to the level of dividends to be paid out each year and when.

 

Remedies

If you feel that the company is being run contrary to your interests what action can you take?

If the other shareholders are acting in breach of a shareholders agreement to which you are a party then you can apply to court to enforce that agreement (to require the shareholders to do or refrain from doing the matter in question) or to claim damages for breach of contract. You may also bring an action against the other shareholders or the company if they are acting in breach of the company's Articles. If there is no shareholders agreement then your remedies are more limited. The courts are reluctant to interfere with the operation of a company by the majority of its shareholders.

However, the courts have allowed minority shareholders to make successful claims on behalf of the company against majority shareholders where the company is acting illegally or ultra vires or where the majority shareholders are committing a fraud on the minority. Proving a fraud on the minority can be difficult but a common example is where the majority shareholders take a contract or opportunity offered to the company for their own benefit.

A company may also be wound up upon the order of the court if it believes that it is just and equitable that it should be wound up. You may only apply to court for this order if the shares were originally issued to you or you have held the shares for at least six months. Examples of where the court has found it just and equitable to wind-up the company include where a shareholder/ director of a company which was effectively a partnership between two individuals was removed as director, where there was total deadlock at both board and shareholder level and where a director (who was also the majority shareholder) acted in such a manner that the other shareholders lost confidence in his integrity.

The court will not order a winding-up if you have another remedy which is not "all or nothing". One such possibility is an application to the court for an order that the company's affairs have been or are being conducted in a manner unfairly prejudicial to the interests of some or all of its members. To be successful you must prove "unfair prejudice". Whilst there is considerable uncertainty as to what this means, the more obvious abuses will be picked up -for example, a persistent refusal to give you information to which you are entitled or running the company in a manner intended to diminish the value of your shares so that you may be bought out more cheaply.

If you can show unfair prejudice the court can make whatever order it thinks fit. Possible orders include requiring the company to conduct its business in a certain manner in the future, requiring the company to do or refrain from doing a certain act or (most commonly) requiring the majority shareholders to buy-out the minority at a specified price. Because of the wide range of remedies that it offers, the "unfair prejudice application" is often considered the most appropriate route for minority shareholders to take.

Conclusion

Conclusion Whilst minority shareholdings often work very well (at least while all the shareholders are being friendly) it is only when things go wrong that you can realise how little protection you actually have. However, armed with this note you should be able to decide what rights you might want to seek before taking your shareholding, what rights you have as a minority shareholder and what you can do to enforce your rights if things turn sour.

Should you require further information or specific advice, please contact Charles Martin at Macfarlanes' London office.

This note provides a general outline of this subject. Each case requires specialist advice depending upon its own particular circumstances and no responsibility can be accepted for the application of the principles contained in this note unless we have given such advice.

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