An individual is considered a minority shareholder if they have less than 50% of the voting rights in a limited company.
Such a standing can, depending on a company’s shareholding situation, leave a shareholder vulnerable, especially when it comes to their decision-making powers (or lack thereof). But what can a minority shareholder do to protect their rights? Let’s take a look.
Understand your rights as a minority shareholder
Exactly what a shareholder, and specifically for this post, a minority shareholder, can and can’t do is informed by the percentage of shareholding that they hold in a limited company, and the articles of association the company has adopted.
Below you will find the rights a minority shareholder has if a company has been formed with the Model articles of association (as most companies are):
The rights of a person with a 5% (or less) shareholding:
- The right to ask the court to call a general meeting
- The right not to be unfairly prejudiced
- The right to have the company wound up provided that it is just and equitable to do so
- The right to vote on resolutions
- The right to a dividend if one is declared
- The right to a share certificate
- A right to have their name entered on the register of members
- The right to copies of the company’s accounts and reports
- The right to an AGM (if the articles of association state that the company must hold an AGM)
- The right to inspect minutes of general meetings
- The right to inspect the register of members and index of members’ names without charge
- The right to require a copy of the register of shareholders within 10 days of the request, subject to a charge
- The right to inspect the register of directors’ service contracts without charge
- Registers to be maintained at a company’s registered office
- Register of directors and secretaries.
- Register of members
- Register of directors’ interests in shares
- Minute books
The rights of a person with more than a 5% shareholding:
- The right to require the circulation of a proposed written resolution and with it a statement
- The right to circulate a statement with respect to (a) a matter referred to in a proposed resolution to be dealt with at that meeting, or (b) other business to be dealt with at that meeting
- The right to call a general meeting
The rights of a person with a 10% shareholding:
- The right to have a company’s annual accounts audited
The rights of a person with more than a 25% shareholding:
- Block special resolutions
All other rights, including being able to pass ordinary resolutions (more than 50%) and special resolutions (75%), are attached to the majority shareholder(s).
Work to resolve shareholder disputes
Conflict between shareholders is common and can arise for several reasons.
As a minority shareholder, an individual may grow frustrated by the lack of control that they have over the company’s direction, and feel strong-armed by majority shareholders into decisions that they do not agree with. As exasperated as this may make a person feel, this is not surprising, given a minority shareholder’s status within the company.
In instances such as this, where no actual wrongdoing has taken place, the shareholder should look to resolve the conflict by discussing their grievances with their fellow shareholders and directors and work to fix the issue quickly and cleanly. It may even be appropriate to bring in a professional mediation service.
Hopefully, this concludes with a satisfying resolution. Measures could then be taken to ensure such a conflict does not arise again, by amending the articles of association, or if one is in place, the shareholders’ agreement (as covered below).
However, in the unfortunate event that a resolution can’t be reached, it may be in the best interests of all parties involved for that shareholder to sell their shares and make a clean break.
As a last resort, take the issue to court
The severity of the issue will inform the course of action that a shareholder chooses to take. If a minority shareholder feels that wrongdoing has taken place and their rights as a shareholder have been compromised, they may wish to resolve the matter through court action.
This is generally not appealing due to the cost, time, and the risk involved in doing this, and should only be considered as a last resort (particularly the winding up option which results in the company being closed down).
Nonetheless, if a shareholder has decided that they wish to make this a court matter, here are the options available:
Unfair prejudice claim – For when a shareholder believes that they have been unfairly prejudiced by other shareholders or directors. For example, a shareholders’ agreement has been implemented by the company, but the rights assigned to the claimant have been ignored.
Derivative claim – For when a shareholder believes another shareholder or director has wronged the company as a whole, and not themselves. For example, a shareholder/director has been negligent in their duties.
Winding up – For when a shareholder believes there has been an absolute breakdown in their relationship with the director(s). For example, the company simply can not operate anymore as there is no communication between the shareholder(s) and director(s).
Pre-empt potential conflict and take preventative action
As highlighted above, the Companies Act 2006 and Model articles of association provide shareholders with specific rights. However, these rights can be enhanced (before or after a company has been formed) through amendments to the articles of association and the introduction of a shareholders’ agreement (or amendments to this, if one is already in place).
Shareholder provisions that you may consider adding include:
Changes to voting rights – How decisions are made amongst shareholders can be tailored. For example, a company could set out the stipulation that certain key decisions can only be made unanimously.
Tag-along rights – If a majority shareholder chooses to sell their shares, the company may decide that minority shareholders must also have the option to sell their shares at the same price (and on the same terms).
Share transfers – If a majority shareholder chooses to sell their shares, minority shareholders can be given first refusal on these shares.
Anti-dilution – When new shares are added to a company, minority shareholders’ shares could be adjusted accordingly, to ensure their position in the company is maintained.
By taking the time to foresee potential issues, a company can take steps to protect all of its investors and prevent harmful conflict in the future.
So there you have it
You should now have a thorough understanding of what rights a minority shareholder has, the steps you can take to enhance these rights, and what to do in the event of a conflict.
We hope you have found this post helpful. Please leave a comment if you have any questions.