Minority Shareholder Rights and Protections

Dan NailerLegal Assessment Specialist

Updated on 11th August 2024

Minority shareholders are those who own a smaller portion of a company's shares, typically less than 50%. While they don't have the power to control or direct the company's decisions on their own, they still hold important rights that protect their interests and make sure they are treated fairly.

For minority shareholders, being informed about their rights means they can actively protect their investment and participate in significant decisions affecting the company. For business owners, understanding these rights is vital to maintaining fair and transparent operations, preventing disputes, and making sure all shareholders are treated justly.

In the UK, minority shareholder rights are primarily governed by the Companies Act 2006, which outlines the legal framework within which companies must operate and provides specific protections for minority shareholders. These rights range from the ability to block certain decisions to ensuring access to important information about the company's financial health and operations.

The Companies Act 2006 is designed to balance the interests of all shareholders, preventing majority shareholders from unfairly taking advantage of their position. It offers various legal remedies if a minority shareholder believes they have been treated unfairly, like the ability to file an unfair prejudice claim.

In this guide, we'll explore these rights in detail, discuss the common challenges minority shareholders face, and provide practical advice on how to safeguard your interests within a company. We'll also look at recent legal developments that have further shaped the landscape of minority shareholder rights in the UK.

Who is a minority shareholder?

A minority shareholder is someone who owns less than 50% of a company's shares, which means they don't have enough voting power to control decisions within the company.

This can be anyone from a small investor with a few shares to someone who owns up to 49% of the company, just below the threshold needed to exert control.

The specific rights and influence of a minority shareholder can vary depending on the percentage of shares they hold. For example, someone who owns just 1% of the shares will have less influence than someone with 25%. However, certain legal protections apply to all minority shareholders, regardless of the exact percentage, to prevent them from being unfairly treated by those in control.

What are the rights of minority shareholders in the UK?

While minority shareholders might not have the power to control the company's decisions, they still have several important rights that protect their interests. These are:

1. Right to vote

2. Right to information

3. Right to dividends

4. Protection against unfair prejudice

5. Blocking powers

6. Right to call meetings

Right to vote

Minority shareholders have the right to vote on certain company decisions. These votes usually happen at general meetings, where shareholders make decision on important matters like appointing directors, approving financial statements, or making changes to the company's Articles of Association.

Voting powers are proportional to the number of shares held. For example, if you own 10% of the company's shares, your vote carries the same weight. While one vote alone might not sway the outcome, minority shareholders can band together to influence decisions, particularly when it comes to blocking special resolutions, which require a higher threshold to pass.

Right to information

Shareholders have the right to access certain information about the company. This includes inspecting the company's financial records, reviewing the annual accounts, and seeing the minutes from general meetings.

This right is important because it allows you to stay informed about your investment and makes sure you aren't kept in the dark about how the company is performing or how decisions are made.

Right to dividend

Dividends are payments made to shareholders out of the company's profits. If the company decides to pay dividends, minority shareholders are entitled to their share based on the number of shares they own. For example, if you own 5% of the shares and the company declares a dividend, you are entitled to 5% of the total dividend payout.

However, it's important to note that dividends aren't guaranteed. The decision to pay a dividend is usually made by the directors and approved by the shareholders. If the company isn't doing well financially or if the directors decide to reinvest profits back into the company, dividends may not be paid.

Protection against unfair prejudice

The law provides specific protections for minority shareholders under Section 994 of the Companies Act 2006.

If you believe that the company's affairs are being conducted in a way that is unfairly prejudicial to your interests, you can file an 'unfair prejudice' petition in court.

Unfair prejudice can happen in many ways, such as when majority shareholders make decisions that disproportionately harm minority shareholders or when they exclude minority shareholders from important decisions. If the court agrees that you have been treated unfairly, it can order various remedies, such as requiring the majority shareholders to buy your shares at a fair value.

Blocking powers

One of the most powerful rights of minority shareholders is the ability to block certain special resolutions (decisions that require the approval of at least 75% of shareholders).

Special resolutions often involve major changes, like altering the company's constitution, approving mergers, or winding up the company. By blocking these decisions, minority shareholders can protect their interests and stop the majority from making changes that might harm them.

Right to call meetings

Minority shareholders holding at least 5% of the company's voting shares have the right to request the company to call a general meeting. This is an important power because it allows you to raise issues that the majority shareholders might prefer to ignore.

Additionally, with the same 5% shareholding, you can require the company to circulate a written resolution to all shareholders. This enables you to propose decisions directly to the shareholders, bypassing the board of directors if necessary.

Challenges faced by minority shareholders

Being a minority shareholder in a company can sometimes feel like you're on the outside looking in. While you have certain rights and protections, there are also significant challenges that come with not having a controlling stake.

Lack of control

One of the most obvious challenges minority shareholders face is the lack of control over company decisions. Since you hold less than 50% of the shares, you don't have enough voting power to influence or direct the company's actions on your own.

This can be frustrating, especially if you believe the company is heading in the wrong direction or if the majority shareholders are making decisions that don't align with your interests. While you have the right to vote, your vote may not carry enough weight to make a difference unless you can rally other minority shareholders to your side.

Oppression by majority shareholders

Minority shareholders sometimes face oppression by those who hold the majority as shares.

For example, majority shareholders might use their power to pass resolutions that dilute your shareholding or make it harder for you to sell your shares. They could also refuse to provide information about the company's financial health.

As we've mentioned, however, the good news is that there are legal remedies available if you believe you're being unfairly treated.

Dilution of shares

Dilution of shares happens when the company issues new shares, which can reduce the percentage of the company that your shares represent. For example, if you own 10% of a company and it issues more shares, your ownership percentage could drop, reducing your influence and the value of your investment.

Dilution can be particularly problematic if the new shares are issued at a price that undervalues the company or if they are allocated to majority shareholders in a way that strengthens their control. To protect against this, the law provides pre-emption rights, which give existing shareholders the right to buy new shares before they are offered to others. However, these rights can be waived in some circumstances, so it's important to be vigilant and assert your rights when necessary.

Limited access to information

Sometimes, majority shareholders or directors deliberately withhold information or provide incomplete or misleading data, making it difficult to make informed decisions about your investments or challenge the actions of majority shareholders.

The law does provide some protection here in that, as a shareholder, you have the right to inspect certain company records. However, accessing this information can sometimes be a battle, especially if the majority shareholders are resistant.

Protective mechanisms for minority shareholders

Minority shareholders, while holding less control over company decisions, still have several mechanisms at their disposal to protect their interests and make sure they are treated fairly.

By utilising these protective mechanisms, minority shareholders can secure their position within a company and ensure that their interests are not overlooked or undermined.

Shareholders' agreement

A shareholders' agreement is a private contract between the shareholders of a company that outlines their rights and obligations.

As a minority shareholder, you should negotiate for clauses that protect your investment. This might include rights to be consulted on significant decisions, access to financial information, or restrictions on the transfer of shares to prevent dilution.

Amending Articles of Association

The Articles of Association are the rules that govern how a company is run. They are public documents but can be tailored to provide additional protections for minority shareholders.

For example, amendments can be made such as requiring a supermajority vote for certain decisons. Veto powers can also be added to give minority shareholders the ability to block decisions that could harm their interests, such as the issuance of new shares or changes in the company's direction.

Amending the Articles requires the approval of at least 75% of the shareholders, so it's often necessary to negotiate these changes with the majority shareholders before any disputes arise.

Pre-emption rights

Pre-emption rights allow existing shareholders to buy new shares before they are offered to outside investors. By law, they are generally included in the Articles of Association. However, they can be waived or disapplied, so it's important to make sure they are explicitly protected both in the Articles and the shareholders' agreement.

In some cases, minority shareholders can negotiate enhanced pre-emption rights that allow them to purchase more than their pro-rata share of new stock, further protecting against dilution.

Veto powers

Veto powers give minority shareholders the ability to block certain decisions or actions that require shareholder approval.

Veto rights can be applied to any decisions that affect the share capital of the company, such as issuing new shares or altering the rights attached to existing shares. They can also cover changes to the company's structure and operations that could diminish the value of your shares, such as entering into new business lines or taking on significant debt.

Dispute resolution options for minority shareholders

Minority shareholders can find themselves in situations where disputes arise, whether due to disagreements with majority shareholders or concerns about how the company is being managed.

While disputes are a common part of business life, as a minority shareholder, you have several options to resolve them.

For example, both mediation and arbitration can be included as clauses in shareholders' agreements, ensuring that disputes are handled through these methods before any court action is taken.

When mediation and arbitration aren't viable or have failed, minority shareholders can turn to courts for resolution.

Unfair Prejudice Petition

If you believe that the company's affairs are being conducted in a way that is unfairly prejudicial to your interests, you can file an unfair prejudice petition. The court may order a variety of remedies, such as requiring the majority shareholders to buy your shares at a fair value or reversing actions that have caused prejudice.

Derivative action

Derivative action allows a minority shareholder to bring a lawsuit on behalf of the company against a director or third party.

This is typically used when a director's actions have harmed the company, and the company itself hasn't taken any action.

Winding up on just and equitable grounds

In extreme cases, you can apply to the court to wind up (close) the company if it's no longer feasible to continue the business due to severe disputes or mismanagement.

Exit strategies

Sometimes, the best way to resolve a dispute is to leave the company entirely by:

• Selling your shares, either to other shareholders, back to the company, or an outside party;

• Selling your shares back to the company or the other shareholders at a predetermined price or valuation method (if your shareholders' agreement includes a buyout clause);

• The court ordering majority shareholders to buy your shares at a fair value.

Recent legal developments impacting minority shareholder rights

One of the landmark cases that have recently shaped minority shareholder rights in the UK is Ntzegkoutanis v Kimionis. This case involved a dispute where the minority shareholder, Mr. Ntzegkoutanis, claimed that the majority shareholder, Mr. Kimionis, conducted the company's affairs in a manner that was unfairly prejudicial to his interests.

In this case, the court provided further clarification on what constitutes unfair prejudice under Section 994 of the Companies Act 2006. It reinforced that any conduct by the majority shareholders that is oppressive, discriminatory, or disregards the interests of minority shareholders can be considered unfairly prejudicial.

The ruling emphasises that minority shareholders have the right to challenge actions that they believe harm their interests, even if those actions are within the legal rights of the majority shareholders.

In addition to case law, recent legislative changes have also impacted the rights of minority shareholders.

The Companies (Miscellaneous Reporting) Regulations 2018 introduced new reporting requirements for large companies, focusing on how they engage with their shareholders. Companies are now required to report on how they take into account the interests of all shareholders, which provides minority shareholders with more transparency and insight into the company's decision-making processes.

Further, the Corporate Insolvency and Governance Act 2020, despite being primarily introduced in response to the COVID-19 pandemic, also has implications for minority shareholders, particularly concerning company restructuring and insolvency processes.

The Act introduced new moratoriums and restructuring plans, which could impact minority shareholders' rights. For instance, the new restructuring plan mechanisms allows companies to bind dissenting classes of creditors and shareholders, including minorities, to a plan that is sanctioned by the court, even if they do not agree with it.

Ongoing discussions around potential reforms to the Companies Act 2006 may further impact minority shareholder rights. However, these are still under discussion.

Can a minority shareholder be forced out of a company?

There are circumstances where a minority shareholder might be forced out of a company.

In some cases, the company's sharheolders' agreement or Articles of Association might include provisions that allow for the forced sale of shares under specific circumstances. For example, a 'drag-along' clause might allow majority shareholders to force minority shareholders to sell their shares if the majority agrees to sell the entire company.

Another situation might involve a 'compulsory buyout' clause, where, under certain conditions, the company or the majority shareholders can force a minority shareholder to sell their shares.

Or, if a shareholder or a group pf shareholders acquires at least 90% of a company's shares, they can initiate a 'squeeze-out.' which allows them to force the remaining minority shareholders to sell their shares. This typically happens during a takeover when the new majority shareholder wants to consolidate ownership.

If a dispute arises between shareholders and it can't be resolved, the majority shareholders might attempt to force out a minority shareholder by other means, like diluting their shares. However, such actions are subject to strict legal scrutiny and must comply with the protections provided under UK law.

How can I protect my investment as a minority shareholder?

There are several strategies and legal protections you can use to protect your interests and ensure that your investment is treated fairly, including:

Understanding and utilising shareholders' agreements

As a minority shareholder, it's vital to make sure your shareholders' agreement includes specific protections for your investment. Key provisions to look for or negotiate into the agreement include:

• Pre-emption rights

• Tag-along rights

• Veto powers.

Stay informed

Staying informed about the company's financial health and performance is critical.

If you feel that information is being withheld or that the company's affairs aren't being managed transparently, you have the right to request access to more detailed records, including the company's financial statements and meeting minutes.

Exercise your voting rights

Even though your voting power is limited as a minority shareholder, you should still exercise your voting rights wheneever possible. By doing so, you not only make your voice heard but also have the opportunity to align with other minority shareholders to influence decisions.

If the company is not conducting votes fairly or you believe your vote is being disregarded, you can challenge these actions legally.

Take legal action if necessary

If you believe your rights as a minority shareholder are being violated, you have legal remedies available. One of the most powerful is the unfair prejudice petition, which allows you to take legal action if the company's affairs are being conducted in a way that is unfairly prejudicial to your interests.

Consider your exit strategy

In some cases, the best way to protect your investment might be to exit the company entirely. This could involve selling your shares back to the company, to other shareholders, or an external buyer.

If you're unable to sell your shares or believe you're being forced out unfairly, legal action may be necessary to secure a fair exit. Courts can order a buyout at a fair value, making sure you are not short-changed.

What is unfair prejudice, and how can I prove it?

Unfair prejudice typically involves situations where the majority shareholders misuse their power to benefit themselves at the expense of the minority shareholders. Some common examples of this include:

• If you are a minority shareholder with a legitimate expectation to be involved in the management of the company, being excluded from key decisions or removed from a directorial position could be considered unfair;

• If the company is generating profits but the majority shareholders refuse to distribute dividends to punish majority shareholders or force them out;

• When majority shareholders use company resources for personal gain, thereby reducing the value of the company and, consequently, your shares;

• If majority shareholders issue new shares solely to dilute the voting power and influence of minority shareholders.

Proving unfair prejudice involves demonstrating that the actions of the majority shareholders or the company's directors have negatively and unfairly impacted your interests.

Courts will look at the context of the alleged unfair actions. For example, if you were promised a role in the company's management and were later excluded without cause, this could support a claim of unfair prejudice.

If you find yourself in such a situation, consulting with a corporate lawyer can help you take steps to protect your rights and seek justice.

Conclusion

As a minority shareholder, your rights are the first line of defense against any actions that may harm your interests.

To further safeguard your rights, it's essential to:

• Stay informed about the company's performance, financial health, and key decisions;

• Act quickly if something doesn't feel right;

• Make sure you have a robust shareholders' agreement in place and that your rights are clearly defined in the company's Articles of Association;

• Keep detailed records of communications, decisions, and agreements.

Finally, if you ever find yourself in doubt or facing a complex situation, don't hesitate to seek legal advice. Having a solicitor who specialises in corporate law can make a significant difference, whether it's negotiating a better shareholder's agreement or resolving a dispute.

Remember, your rights as a minority shareholder are there to protect you. Knowing them and using them effectively is the best way to make sure your investment remains secure.

At Lawhive, our network of experienced corporate lawyers is on hand to provide expert advice and guidance related to minority shareholder rights and protections.

For more information and a free case evaluation, contact us today.