Whilst directors are responsible for managing a company, it is the shareholders (members) who own the business. Consequently, shareholders have certain rights, which are enshrined in the Companies Act 2006, the articles of association, and shareholders’ agreements. In this post, we will consider some of the main statutory rights of shareholders.
Rights of all shareholders
All company shareholders have the right to:
- Inspect company information, including the register of members (s. 116 Companies Act 2006) and a record of resolutions and minutes (s. 358) without any charge.
- Derivative claims – members can bring a claim against a company director known as a derivative claim (s. 260). This is essentially a claim on behalf of the company in relation to a breach of duty, trust, negligence or default by a director.
- Attend general meetings – notice must be given to members regarding any shareholder meetings (s. 310).
- Vote on certain company affairs – subject to their class of shares and the articles of association, members have a right to vote on certain company resolutions (s. 284).
- Appoint proxies – shareholders are entitled to appoint another person as their proxy to exercise any relevant rights to attend, speak, and vote at a meeting of the company (s. 324).
- Receive annual accounts – companies are required to distribute a copy of annual accounts and reports for each financial year to every shareholder (s. 423).
- Share certificates – members are entitled to be issued with a share certificate within two months of their shares being allotted (s. 769). This does not necessarily constitute a paper certificate. In addition to issuing share certificates, companies must also add new members to their register of members (s. 113).
- Inspect directors’ service contracts – all members are entitled to inspect a copy of every director’s service contract with the company or with a subsidiary of the company, or a written memorandum setting out the terms of their contract (s. 229).
- Petition unfair prejudice – under s. 994, a company shareholder “may apply to the court by petition for an order […] on the ground […] that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members.”
Rights of shareholders possessing at least 5% of shares
- Written resolution – members of a private company holding at least 5% of shares “may require the company to circulate a resolution that may properly be moved and is proposed to be moved as a written resolution” (s. 292). This is a method for shareholders to propose a written resolution in the absence of a board resolution to do so.
- Call a general meeting – according to s. 303(2), company “directors are required to call a general meeting once the company has received requests to do so from” members holding at least 5% of shares.
- Circulation of statements – under s. 314, “members of a company may require the company to circulate, to members of the company entitled to receive notice of a general meeting, a statement of not more than 1,000 words 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.”
Rights of shareholders possessing at least 10% of shares
- Audit – where a company is exempt from an audit, members who hold at least 10% of shares can force an audit to be held in respect of company accounts for a financial year (s. 476).
- Right to demand a poll – in general, members holding 10% of voting shares (or five members who have the right to vote) can demand a poll in respect of a proposed resolution (s. 321). If there is a provision in the company’s articles of association which precludes this right, it will be considered void (except if it pertains to the election of the chairman of the meeting, or the adjournment of the meeting).
Rights of shareholders possessing more than 10% of shares
- Block short notice meeting – in a private limited company, members holding more than 10% of shares can prevent a general meeting which is proposed to be held on less than the statutory amount of notice (s. 307).
- Block squeeze out – the compulsory sale of the shares of minority shareholders (known as a ‘squeeze out’) can be blocked by members holding in excess of 10% of company shares (s. 979).
Rights of shareholders possessing at least 15% of shares
- Variation of class rights – under s. 633, if there is a proposal to vary the class rights of shares, “holders of not less in the aggregate than 15% of the issued shares of the class in question…may apply to the court to have the variation cancelled.”
Rights of shareholders possessing more than 25% of shares
- Block special resolutions – to be successfully passed, special resolutions must be accepted by “members representing not less than 75% of the total voting rights of eligible members“ (s. 283). As such, shareholders who control over 25% of voting rights can block a special resolution.
- Block schemes of arrangement – a scheme of arrangement is a formal statutory procedure under which a compromise or arrangement is reached between a company and its members or creditors, the purpose of which is generally to restructure finances (sometimes due to looming insolvency). Members holding more than 25% of shares can block any such scheme of arrangement (s. 899).
Rights of shareholders possessing at least 50% of shares
- Block ordinary resolutions – shareholders controlling at least 50% of voting rights can effectively block any proposed ordinary resolutions (s. 282). Since ordinary resolutions are associated with the general management of a company, the ability to block such resolutions can hinder the day to day running of the business.
Rights of members holding more than 50% of shares
- Pass ordinary resolutions – according to s. 282, ordinary resolutions can be “passed by members representing a simple majority of the total voting rights of eligible members”, i.e. holding in excess of 50% of shares with voting rights. It should be noted that a director of a company with this level of shareholding is deemed to effectively be in control of the company (s. 255) – known as a director “controlling” a body corporate.
Rights of shareholders possessing at least 75% of shares
- Pass special resolutions – a special resolution must be “passed by members representing not less than 75% of the total voting rights of eligible members” (s. 283).
- Pass schemes of arrangement – according to s. 899: “If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members…agree a compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement.”
Rights of shareholders possessing at least 90% of shares
- Pass short notice meeting – in a private limited company, members holding 90% of shares can call for a general meeting, which is proposed to be held on less than the statutory amount of notice (s. 307). This figure rises to 95% in respect of public limited companies.
- Pass squeeze out – the compulsory sale of the shares of minority shareholders (known as a ‘squeeze out’) can be passed by members holding 90% of company shares (s. 979).
Articles of association, shareholders’ agreements, and class rights
In addition to their statutory rights, of which some of the key ones have been outlined above, members may have additional rights contained in the articles of association and shareholders’ agreement.
Articles of association
All limited companies are required to adopt articles of association as part of the incorporation process. This document essentially sets out the rules which govern how the company operates.
The articles will normally include provisions defining certain rights of shareholders, such as those related to decision-making processes (e.g., voting in general meetings) and payments of dividends.
Although it is not a requirement for a limited company to put in place a shareholders’ agreement, many choose to do so. Supplemental to the articles of association, it generally serves to clarify the powers and rights of shareholders.
Some shareholders’ agreements may define how dividends are to be distributed among members and specify additional voting rights, or any rules regarding the transfer or sale of shares.
It is important to note that some shareholders will have different rights compared to other members, irrespective of the quantity of shares they hold.
Although the term “class rights” is not defined by the Companies Act 2006, s. 929 notes that it generally refers to “the rights that attach to a particular share relate to matters such as voting rights, a right to dividends and a right to a return of capital when a company is wound-up. Rights attach to a particular class of shares if the holders of shares in that class enjoy rights that are not enjoyed by the holders of shares in another class.”
A common example of differing class rights attached to shares is the case where one member has voting rights and another does not.