Shareholders are co-owners of a company thanks to investing in shares, also known as units of company ownership. While shareholders may not be actively engaged in managing the company, they have special rights that influence its trajectory. These rights cover voting and appointing new company directors and top management, accessing company information, and influencing company decisions.
However, the rights of a shareholder in a private company depend on the type of shares held, the shareholder’s agreement, and what the company’s governing document - the Articles of Association dictates. These factors also influence how shareholders may exercise their rights, potential liabilities, and ways to resolve disputes on rights.
Key Shareholder Rights in a Private Limited Company
Shareholders in private companies hold various rights that ensure their involvement in key decision-making processes and protect their interests. These rights empower shareholders to participate in company meetings, receive dividends, and inspect vital company documents, among other things. The scope and nature of these rights are often outlined in the company’s Articles of Association and shareholder agreements. Understanding these rights is essential for shareholders to maintain their influence and protect their investment within the company.
1. Right to Attend and Vote at General Meetings
All shareholders are entitled to attend and vote on important company decisions at the company’s general meetings. This right comes with additional rights to receive notice of meetings on time, both the Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs).
Note that the strength of a shareholder's vote depends on the amount of shares held. However, some shares hold varied voting strength depending on the company’s Articles of Association. In most cases, all shares, a.k.a nominal shares, hold one vote per share, but there are weighted or dual-class shares that may hold more than one vote per share. Ultimately, a shareholder's voting strength depends on what the company’s Articles of Association declares.
2. Right to Receive Dividends
All shareholders have the right to receive dividends profit when the company declares them. Note that dividends are only given based on the share classes, with preference shareholders receiving dividends first. However, the decision to declare dividends is at the discretion of the company’s board and is based on the company’s financial performance.
3. Right to Inspect Company Records
Shareholders, as co-owners of a company, are entitled to review company documents that are otherwise unavailable to the public. These documents include financial accounts, minutes of meetings, and other constitutional documents. This right aims to ensure transparency and accountability in company management and performance.
4. Right to Transfer Shares
All shareholders reserve the right to transfer their shares based on the guidelines of the shareholders agreement and the company’s Articles of Association. This way, they can realise a profit on investment and ensure ease of change in ownership.
5. Right to Appoint or Remove Directors
Besides the right to vote in meetings, shareholders reserve the right to vote to appoint or remove directors. This way, they can maintain the company's management and hold directors accountable for their performance.
6. Pre-emption Rights
This right prioritises existing shareholders when new shares are issued by the company. As such, shareholders can easily maintain or increase their percentage of ownership in the company. It also helps to prevent the dilution of the strength of shares held by existing shareholders.
Rights of Minority Shareholders in the UK
Minority shareholders are a class of shareholders that hold less than 50% of shares in a company. As such, they cannot resist certain company decisions taken by the majority. To protect their interests, they have the following rights:
Protection Against Unfair Prejudice: Minority shareholders reserve the right to resist prejudicial company resolutions. This right is exercised through petitioning the court to investigate and possibly set aside such unfairly prejudicial decisions. It serves as a means of checking the abuse of power by majority shareholders.
Derivative Actions: Where company decisions appear counterproductive or fraudulent, minority shareholders can institute a derivative action in court on behalf of the company. This way, the minority shareholders protect their interests and those of the company from issues ranging from negligence or breach of duty by directors to fraudulent transactions permitted by majority shareholders.
Right to Call a General Meeting: All shareholders are entitled to attend and vote at general meetings. However, only shareholders holding at least 5% of the paid-up share capital may call for general meetings. As such, minority shareholders can band together to meet the 5% mark and call for general meetings to discuss and vote on key issues affecting the company.
Liabilities of Shareholders
Limited Liability: Generally, shareholders’ liability is limited to the amount unpaid on their shares. This means that they’d be responsible for the amount unpaid on their shares during liquidation. Their personal assets are protected from being used to settle the company’s debts. Note, however, that this protection can be lifted in cases of fraud or other grievous misconduct.
Personal Guarantees: As co-owners of a company, shareholders may be liable to provide personal guarantees for the company’s debts or obligations. As such, they may be liable to cover debts or breach of contract on behalf of the company.
Challenging and Enforcing Shareholder Rights
Shareholder disputes are inevitable in corporate governance, and that’s why the Articles of Association hold clauses for dispute resolution. There are at least three dispute resolution mechanisms in enforcing shareholders rights, and they are:
Mediation is a series of negotiations presided over by a neutral third party that is usually non-binding.
Arbitration: is a series of settlement talks presided over by a legally recognised arbitrator and is binding and enforceable in court
Legal action: where other mechanisms fail, shareholders can approach the court for relief where their rights are infringed or ignored.
When it comes to protecting shareholder's rights and interests, it’s safer and less expensive to consult a corporate lawyer who’s experienced in handling corporate disputes. Their expertise makes them better suited to analyse and proffer legal advice to manage disputes effectively.
Best Practices for Protecting Shareholder Rights
Ensuring the protection of shareholder rights is crucial for maintaining trust and transparency in a company. The following best practices help prevent conflicts and ensure all parties align with the company's goals and governance.
Understand the Articles of Association: Corporate governance starts with understanding a company's governing documents. Shareholders who review and thoroughly understand the company's articles of association and shareholders agreement are better positioned to enforce their rights and fulfil their obligations.
Maintain Open Communication: The cheapest way to manage disputes is to avoid escalation through dialogue. Irrespective of differences in opinion, shareholders and directors should maintain open communication and prioritise the company’s interests. Informal conversations in less tense environments will foster understanding and collaboration.
Document Everything: Records are essential in proving matters whether in court or at general meetings. All communications and decisions taken should be documented to prevent derailing from an agreed course of action, neglecting duty, or infringing on established shareholder rights.
Legal and Regulatory Considerations
The UK corporate law sector is heavily regulated to ensure fairness in market competition and corporate governance. The following laws regulate the rights and liabilities of shareholders:
Companies Act 2006
Listing Rules of the Financial Conduct Authority
Disclosure and Transparency Rules of the Financial Conduct Authority
UK Corporate Governance Code
The company’s Articles of Association and Shareholders’ Agreements are essential in determining the rights of shareholders. Enforcing the rights begins with reviewing and understanding them from these overriding documents. Shareholders must consult corporate lawyers to review these documents before accepting the terms.
FAQs
What rights do shareholders have in a private limited company?
Shareholders primarily have the right to vote at general meetings to influence company decisions and the right to receive dividends. They also have the right to transfer their shares, vote the appointment or removal of a director, inspect company documents, and be prioritised during new issuance of company shares.
How can I protect my rights as a minority shareholder?
As a minority shareholder, you can protect or enforce your rights through legal action in court. You could do this to resist prejudicial company decisions or bring a derivative action to protect both your interest and that of the company from fraudulent and negligent decisions.
Can shareholders remove a director from a private company?
Yes, shareholders can remove a director from a private company. This is done via voting at a general meeting.
What happens if a company refuses to pay dividends?
Shareholders are entitled to dividend payouts from a company, but this is based on the company’s discretion. If a company refuses to pay dividends and does not show tangible reasons for such refusal, such as poor market performance, shareholders can institute legal action to investigate the company’s transactions and management.
While delaying dividend payments may have positive results, it may also be negative, as investors’ trust may be lost, which will also affect the company’s market value.
What are pre-emption rights in a private company?
Pre-emption rights are rights to shareholders that ensure that a private company prioritises them when issuing new shares.
Conclusion
The rights of shareholders determine their influence and control in a private company. These rights cover voting and influencing company decisions, receiving dividends, inspecting records, instituting derivative actions in court, and protecting against unfair prejudice. While these rights ensure that shareholders are protected, shareholders must review overriding documents such as the company’s Articles of Association and shareholders’ agreements to vet against malicious clauses.
To better enforce shareholders’ rights in a company, Lawhive has a dedicated team of commercial and corporate law experts who can review these overriding documents and provide personalised advice on protecting and exercising these rights while safely navigating corporate disputes. Contact us today for a free case evaluation.