As a minority shareholder, you have certain rights which will help you protect your interests as a company shareholder and also hold the company to account. These rights are found in several places, including:
- The Companies Act 2006
- The Insolvency Act 1986
- The articles of association of the company
- Your shareholders’ agreement
- Common law
Below is a guide to minority shareholder rights, as well as advice on protecting and enforcing these.
Summary
The article includes:
Minority Shareholder Decision Rights
Rights under the Companies Act 2006
The Companies Act 2006 (the Act) provides a range of rights for minority shareholders, including:
Protection against unfair prejudice – under Section 994, where a company is conducting matters in a way which unfairly prejudices the interests of shareholders, or an act or omission is proposed that would be unfairly prejudicial, any shareholder has the right to apply to the court for a remedy.
The right to certain information – under Section 116, shareholders are entitled to see company information, such as minutes of general meetings and the company’s register of members, for free. The request must be made formally, and include the name and address of the individual making the request and the way in which the information will be used. The company can only deny this request if it is not made for a ‘proper purpose.’
Preemption rights – under Section 561, shareholders have the right of first refusal when new shares are issued for cash.
The ability to object to class rights being varied – under Section 633, shareholders with a minimum of 15% of a specific share class can ask the court to cancel a variation of their rights.
The right to appoint a proxy – under Section 324, a shareholder has the right to appoint a proxy to vote on their behalf at meetings.
Percentage rights for minority shareholders mean you may be afforded different powers depending on the proportion of shares you hold. This is important to know when purchasing shares and deciding whether to increase or decrease your holdings.
Rights under company articles of association
These rights will vary according to the articles in question and may overlap with rights under the Act, but they often include:
- The right to basic company information, including financial information, minutes of general meetings, and annual reports
- The right to inspect certain company records
- The right to vote at a general meeting
- The right to dividends, if declared
- The right of first refusal if new shares are issued, allowing shareholders to maintain their percentage shareholding and avoid dilution
For certainty of your rights under articles of association, you will need to check the specific articles in your agreement.
Resolving a Minority Shareholder Dispute
Statutory claims
It is important not to allow a shareholder dispute to escalate, wherever possible. Even if you have the right to take legal action as a minority shareholder, this is not always the best option, certainly at the outset.
It may be possible to negotiate an acceptable outcome, such as the buyback of shares in an agreed exit. Alternatively, an alternative form of dispute resolution can be used, such as mediation, to try to reach an agreement.
Unfair prejudice
Under Section 994 of the Act, minority shareholders are entitled to petition the court on the grounds of unfair prejudice where the company’s affairs are being, have been or are proposed to be conducted (by act or omission) in a manner that is or would be unfairly prejudicial to the interests of the members generally or some part of the company’s shareholders.
In plain English, if the company is conducting business in a way which unfairly impacts your interests as a shareholder, you can petition the court for a resolution. If the conduct was in the past and has ended, or if the conduct is proposed to take place in the future, you still have this right.
The court will assess whether the conduct complained of is unfair, by considering whether a reasonable bystander would consider it so.
Examples of unfair prejudice include:
- The misappropriation of assets
- Excessive pay awards to directors, particularly when combined with no or only limited dividends paid to shareholders
- Breach of the company’s articles of association
- Breach of the shareholders’ agreement
- Excluding shareholders from decisions where they are entitled to a say
The petitioner will need to show that hardship has been caused; this does not necessarily need to be financial.
If an application is successful, the court can order majority shareholders to buy out the minority’s shares at a fair price.
Where appropriate, an injunction can be put in place, preventing the directors from taking particular action.
In the most extreme cases, the court may consider winding up a company, although this is rare.
Derivative Action
In cases of mismanagement or misuse of power by directors, minority shareholders can consider bringing a derivative claim. This is a claim brought by shareholders on behalf of the company.
Derivative action is used when directors fail in their duties, are negligent, or breach the trust placed in them. Examples include conflicts of interest, making decisions which benefit the directors themselves, not promoting the company, misusing company funds, and taking excessive payments from the company.
The party bringing the claim will need to show that the company has suffered harm as a result.
As the claim is brought on behalf of the company, remedies will relate to the company. They can include:
- Ordering money to be returned to the company
- Removal of directors
- Reversing transactions
Contact Our Corporate Solicitors
If you need advice on minority shareholders’ rights, contact us today, and we will be happy to help. We have many years of experience in representing minority shareholders and providing advice and guidance on enforcing shareholder rights.
For more information on our services, see our corporate solicitors page.
To speak to one of our expert corporate solicitors, ring us on 0300 303 2071, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can assist. We have offices in Birmingham, Northampton, London and Wellingborough.
FAQs
What Rights Do Minority Shareholders Have?
Minority shareholders have rights under legislation, primarily the Companies Act 2006, company documentation, including the articles of association and shareholders’ agreement, and common law.
Rights include:
- Voting rights
- Rights to information
- Rights to block special resolutions, where 25% or more of voting shares are held
- Preemption rights to buy new issues of shares
- The right to bring an unfair prejudice claim
- The right to bring a derivative claim where directors have breached their duties
How Can Minority Shareholders Protect Their Rights?
Ensuring that comprehensive articles of association and shareholders’ agreements are in place is a strong first step. Understanding the rights that you have and keeping on top of a company’s actions will mean you know when rights are not being observed.
If you have concerns over the running of a company, taking early action is recommended. A specialist corporate solicitor will be able to advise you of your rights and the best course of action to protect and enforce them.
It is often the case that the involvement of a corporate solicitor will put directors on notice that their actions are being scrutinised and may be challenged. This can be enough to make a positive change.
Does A 5% Shareholder Have Rights?
Shareholders with 5% of shares have a range of rights, some requiring a minimum of a 5% holding, while others are available to all shareholders.
Rights for shareholders with a 5% holding include:
- The right to require a proposed written resolution and related statement to be circulated
- The right to circulate a statement relating to something contained in a proposed resolution or other business to be heard at a meeting
- The right to call a general meeting
- The right to prevent the reappointment of an auditor
