We have extensive experience protecting minority shareholders rights and the value of their shareholdings. Through our experience we can advise you on effective strategies and get you a fair result in any negotiation. We are discrete, so if you wish to have a conversation as to your options get in touch.
Often times, minority shareholders struggle to have their interests heard and face prejudice due to controlling majority shareholders or directors abusing their powers. In this article, we stipulate the rights and remedies that are available under the law for minority shareholder protection.
Where can I find these rights?
Minority shareholders have statutory rights and, potentially, contractual rights. The statutory rights are enshrined in the Companies Act 2006(for companies that are incorporated in the UK) whereas the contractual rights are typically provided in the company’s articles of association (or AoA) and/or shareholders’ agreement (which is why we always advise clients to get one). These contractual rights can be negotiated to enhance the basic statutory rights, without any limit to the amount of enhancement that can be done over and above the Companies Act.
What are the rights of a minority shareholder? Protection for minority shareholders?
1. Statutory Rights
Unless the company has amended their articles or shareholders agreement to include tailor-made rights minority shareholders will have the following limited rights under the Companies Act:
a) At least 5% or more
- Apply to court for preventing conversion of a public company to a private one
- Call a general meeting
- Require the passing of a resolution at an annual general meeting of a public company
- Require the circulation of a written resolution in private companies
b) At least 10%
- Right to call for a poll vote on a resolution
- Require an audit
c) More than 10%
- Right to prevent a meeting held on short notice in private companies
d) More than 25%
- Prevent the passing of a special resolution
- Prevent compromise arrangement with a member or class of members
e) At least 50%
- Prevent ordinary resolutions
f) More than 50%
- Able to pass an ordinary resolution
g) At least 75%
- Able to pass a special resolution
- Able to approve arrangements with members (court sanction might be required to be effective)
h) At least 90%,
- Remove minority shareholders where a takeover offer has been made
- Consent to short notice of a general meeting
- Right to be bought out by a bidder making a takeover bid
2. Contractual Rights
As discussed above, statutory rights provide only limited and basic rights to minority shareholders in a UK company. Nevertheless, shareholders may amend the articles of association to enhance the statutory provisions and negotiate a tailor-made shareholders agreement to secure better protection. It is usually wise to negotiate the terms and amend the articles before shares are acquired to prevent any future dispute. It requires at least 75% of shareholders’ votes to amend the articles of association, which might complicate matters later if changes are not made pre-emptively. The most common contractual rights are:
a) Power of veto
Minority shareholders can obtain powers of veto, typically drafted in a shareholder agreement, which enables them to prevent specified actions of the company. Examples of such actions are:
- Winding up or voluntary liquidation
- Business sale, merger or change of control
- Large-scale investment
b) Information rights
Unfortunately, minority shareholders usually have limited or no management roles in the company. In consequence, they do not have regular access to updates or information to monitor the performance of their investment besides the regular annual accounts. Minority shareholders usually lack evidence to substantiate their claims that the business is not being run properly. This is because oppressive majority shareholders and directors may refuse to disclose any relevant information to the minority shareholders for their own benefit.
Therefore, the best arrangement is to include in the articles or shareholders agreement the right to view financial records
c) Pre-emption rights
Under the Companies Act, shareholders are entitled to the right to subscribe for shares in any new share issue. However, many corporations either dis-apply such benefits in the shareholders’ agreement or the articles of association, or fix unrealistically high subscription rates to make it hard for a minority shareholder to subscribe; that in turn will cause minority shareholders to suffer dilutionof their shareholding percentage. Therefore, a minority
shareholder should always look out for protection and anti-dilution termsto avoid such a situation.
d) Dispute resolution clause to prevent abuse of power
Incorporation of an alternative dispute resolution clause into the shareholders agreement will protect minority rights in a company further and help solve issues more efficiently. Typically, clauses such as ability to control transfer of shares or agreeing to mediate where dispute arises are included in the agreement for minority shareholders’ protection.
e) Transfer of shares by a minority shareholder
It is wise for minority shareholders to plan an exit route or how their shares will be disposed of via the shareholders’ agreement or the AoA. This is because the Companies Act is silent on many aspects of share transfer or disposal. An example is where, the Act does not deal with how shares will be valued in case a shareholder tries to sell shares by private agreement.
The remedies available to minority shareholders are as follows:
a) Unfair prejudice claims :
Any shareholder can apply to court for relief if the affairs of a company are being conducted in a manner that are unfairly prejudicial to a shareholder’s interests, or an actual or proposed act or omission of the company would be prejudicial under the Companies Act. Situations where unfair prejudice is likely to be proved are, inter alia, when the company’s act or omission has significantly decreased the economic value of the minority shareholding or has fixed subscription rates in such a way, so as to dilute the interests of a minority shareholder.
b) Statutory Derivate claims :
Such claims can be brought under the Companies Act by a shareholder on behalf of the company in relation to a breach of duty by directors. The claim is usually brought when majority wrongfully prevent the company bringing or proceeding with a claim itself.
c) Winding up or voluntary liquidation
If there is an irremediable breakdown between the shareholders and directors, a shareholder may apply for winding up of the company if they have held shares for at least 6 months out of the last 18 months. Generally, the court will only grant such orders where the shareholders have no other options.
Practically, it is not easy for minority shareholders to get these remedies in court. Therefore, it is imperative that minority shareholders agree the terms before investing in a corporation.
As the legal duties of majority shareholders to minority shareholders are rather limited under statute and any remedies are hard and expensive to get, we strongly advise all our clients to consider what protections they require before getting involved with the company as any changes to the status quo later are not easy to agree.