The rights held by shareholders can be crucial in protecting a company’s interests. Shareholders’ powers will depend on a number of factors, including the percentage of shares held and the provisions of the company’s articles of association and shareholders’ agreement.
By exercising their rights, shareholders can safeguard a company and ensure that directors do not exceed their authority. Putting the right documentation in place as soon as possible is crucial. It should be tailored to the needs of the business and give shareholders the powers they require to support and preserve the company.
Summary
This guide covers:
- Types of Companies with Share Ownership and Limited Liability
- General Shareholder Rights (Regardless of Percentage)
- Statutory Shareholder Rights by Percentage Shareholding
- Rights in a Private Limited Company
- Minority Shareholder Protections
- Majority Shareholder Rights
- The Sources of UK Shareholder Rights
- Ensuring Your Shareholders Have the Rights They Need
- Issues and An AGM's Involvement
- Contact Our Company Solicitors
- FAQ
Types of Companies with Share Ownership and Limited Liability
In the UK, there are several types of companies that offer share ownership and limited liability:
- Private Limited Companies (Ltd): The most common type, with shares not available to the public. AGMs are not compulsory, and governance tends to rely heavily on the articles of association and shareholders’ agreements.
- Public Limited Companies (PLC): Can offer shares to the public and may be listed on stock exchanges. Subject to stricter reporting and meeting requirements.
- Companies Limited by Guarantee: Typically used by non-profits; members act as guarantors rather than shareholders.
- Limited Liability Partnerships (LLP): Offering partnership flexibility with limited liability, common for professional firms.
Private companies in particular often have additional restrictions, such as limits on transferring shares, reduced disclosure obligations, and greater reliance on contractual rights between shareholders.
Different Types of Shares
Companies can issue various classes of shares, each with distinct rights:
- Ordinary Shares: Standard shares with voting rights and dividend entitlements.
- Preference Shares: Priority in dividend payments or capital repayment, often with limited voting rights.
- Non-Voting Shares: No voting rights, but may have higher dividend yields.
- Redeemable Shares: Can be bought back by the company under certain conditions.
- Management Shares: Often with enhanced voting rights, used to maintain control.
- Deferred Shares: Subordinate to other share classes in terms of dividends and capital distribution.
Different classes can be tailored to give investors, founders or employees specific levels of control or entitlement.
The Number of Shareholders
The number of shareholders can significantly impact company governance and shareholder rights:
- Single-Member Companies: One shareholder holds all decision-making power.
- Small Private Companies: With few shareholders, they often have more flexible governance structures.
- Larger Private Companies: May require more formal procedures and shareholder agreements.
- Public Companies: Must have at least two shareholders and follow stricter governance rules.
General Shareholder Rights (Regardless of Percentage)
All shareholders, irrespective of the size of their shareholding, hold core rights, including:
- The right to receive a share certificate
- The right to attend general meetings
- The right to vote on resolutions (for voting shares)
- The right to receive annual reports and accounts
- The right to inspect certain company records
- The right to any declared dividends
- The right to transfer shares (subject to restrictions in the articles)
- The right to bonus issues of shares
- Rights on a winding-up, including a share of surplus assets
Statutory Shareholder Rights by Percentage Shareholding
Certain rights only arise at specific shareholding thresholds under the Companies Act 2006. These thresholds are key in understanding shareholder power.
Rights at 5%
- Request a general meeting
- Require the circulation of a written resolution
Rights at 10%
- Call a poll vote at a general meeting
- Prevent the buyout of minority shareholders in a takeover
Rights at 25%
- Block special resolutions
- Prevent changes to articles of association
- Block the disapplication of pre-emption rights
Rights at 50%
- Pass ordinary resolutions
- Appoint or remove directors (unless special rights exist)
Rights at 75%
- Pass special resolutions
- Amend the articles of association
- Change the company name
- Approve certain major transactions
This framework is one of the most important tools for shareholders, as it determines what decisions they can influence or block.
Rights in a Private Limited Company
Private limited companies differ significantly from PLCs, and these differences directly affect shareholder rights:
- No Obligation to Hold AGMs: Decisions can be made through written resolutions.
- Greater Reliance on Articles and Shareholder Agreements: These documents often govern voting arrangements, pre-emption rights, drag-along/tag-along rights, and dividend policies.
- Restrictions on Share Transfers: Most private companies require shares to be offered to existing shareholders before being sold to outsiders.
- Less Onerous Disclosure Requirement: Shareholders may have fewer public information rights but retain statutory access to key internal documents.
Due to this flexibility, private companies regularly customise governance arrangements to suit founders, investors and management.
Minority Shareholder Protections
Minority shareholders have important protections that help prevent abuse by majority owners, including:
- Unfair Prejudice Petitions (s.994 Companies Act): Allowing shareholders to challenge conduct that is unfairly prejudicial to their interests.
- Derivative Actions: Enabling shareholders to bring claims on behalf of the company where directors have breached their duties.
- Just and Equitable Winding-Up: Available in severe cases where the company cannot continue fairly.
- Contractual Protections: Such as veto rights, reserved matters, dividend policies, and share transfer restrictions included in shareholder agreements.
These remedies help ensure that minority shareholders are not sidelined or oppressed by bigger voting blocs.
Majority Shareholder Rights
Majority shareholders typically have substantial powers:
- The ability to pass ordinary resolutions (50%+)
- The ability to pass special resolutions (75%+)
- Influence over appointing or removing directors
- Control over dividend decisions
- Power to amend the articles of association
However, all shareholders must act in accordance with the law, and majority shareholders cannot use their power to act unfairly or oppressively towards minority holders.
The Sources of UK Shareholder Rights
Shareholders’ rights are derived from several sources, including:
- The Company’s Articles of Association
- The Company’s Shareholders’ Agreement
- The Companies Act 2006
- The Insolvency Act 1986
- Case Law
Articles of Association
Ideally, a company will have bespoke articles of association detailing what each shareholder is entitled to do. Matters relating to shareholders that can be dealt with in a company’s articles include:
- Voting rights
- The right to a share of the capital if the company is sold
- The right to receive dividend payments
- The right to have a say in the appointment and removal of directors
- Drag-along and tag-along rights if the company is sold
- What will happen to employee shares if an employee leaves the company
- How shared issues will be dealt with
- How shareholder deadlocks will be decided
Different rights can be attached to different classes of shares. For example, investors could have shares with more powers attached, and directors could have shares that entitle them to larger dividend payments than others.
Shareholders’ Agreements
A shareholders’ agreement works alongside the articles to provide a comprehensive governance framework. Common provisions include:
- Veto rights over significant decisions (loans, acquisitions, director appointments)
- Capital contributions and funding arrangements
- Dividend policy
- Appointment and removal of directors
- Restrictive covenants to protect the business
- Pre-emption rights on share sales
- Drag-along and tag-along provisions
- Exit and leaver provisions
- Dispute resolution processes
If there is a conflict between the two documents, the articles of association prevail, so both documents should be drafted together to avoid inconsistencies.
Statutory Shareholder Rights
Statutory rights are more limited and depend on the number of shares held. The majority of these arise in the Companies Act 2006. They include the right to:
- Certain information, including the minutes of general meetings, to see a register of shareholders and to receive the company’s annual accounts.
- Be given notice of a shareholders’ meeting and to attend the meeting and vote where applicable.
- Appoint someone to vote in their place.
- Receive a share certificate.
- Apply to the courts on the grounds of unfair prejudice or to make a claim on behalf of the company.
- Request a general meeting, requiring a holding of 5% of shares or more.
- Prevent the shares of minority shareholders from being purchased against their will, requiring 10% of shares or more.
- Block shareholder resolutions that are attempted as ordinary resolutions, requiring 50% or more.
- Pass shareholder resolutions as ordinary resolutions, requiring 75% or more.
Ensuring Your Shareholders Have the Rights They Need
Working with an experienced company solicitor means you can ensure your business has the right structure in place, providing the safeguards and restrictions you want for both your shareholders and your company directors.
You will be able to choose what rights you want to give to your shareholders, the level of control you want them to have and how they can limit directors’ actions. Having bespoke articles of association and shareholders’ agreements in place has many benefits, including the following:
- Clarity for all involved, helping avoid misunderstandings.
- Customised governance, offering the right protections and checks.
- Clear dispute-resolution mechanisms, helping preserve business continuity.
- Enhanced credibility, useful when seeking finance, joint ventures or preparing for sale.
Issues and An AGM's Involvement
Annual General Meetings (AGMs) play a crucial role in shareholder engagement:
- Purpose: Review financial statements, appoint auditors, elect directors, and vote on important company matters.
- Shareholder Involvement: Shareholders can ask questions, propose resolutions, and vote on key issues.
- Decision Making: Many important decisions require shareholder approval at AGMs.
- Information Rights: AGMs provide a forum for shareholders to receive updates and information about the company's performance and plans.
Powers to Block
Shareholders can use their voting power to block certain actions:
- Special Resolutions: Require 75% approval, so 25%+ can block.
- Ordinary Resolutions: Require 50% approval, so 50%+ can block.
- Written Resolutions: Can be blocked by shareholders holding sufficient voting rights.
Arranging a Vote
Shareholders can initiate votes through several mechanisms:
- Requisitioning a General Meeting: 5% of voting rights can call for a general meeting.
- Proposing Resolutions: Individual shareholders can propose resolutions for AGMs, subject to certain conditions.
- Circulation of Written Resolutions: In private companies, shareholders can circulate written resolutions.
Contact Our Company Solicitors
If you need advice on shareholders’ rights, contact us today, and we will be happy to help.
For more information on our services, see our corporate solicitors page.
To speak to one of our expert corporate solicitors, ring us at 0330 173 3980, 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.
FAQ
What are the three main ownership rights of a shareholder?
The three main ownership rights are:
- The right to vote on company decisions
- The right to receive dividends when declared
- The right to receive a share of assets if the company is liquidated
What legal rights do shareholders have?
Shareholders have various legal rights under the Companies Act 2006, including:
- Voting rights at general meetings
- The right to receive company accounts and reports
- The right to challenge unfair prejudice
- The right to bring derivative actions on behalf of the company
What are shareholders entitled to see?
Shareholders are entitled to see:
- The company's annual accounts and reports
- The directors' report
- The auditor's report
- Minutes of general meetings
- The register of members
- The register of directors
What rights does a 25% shareholder have?
A 25% shareholder has significant minority protection rights, including:
- The ability to block special resolutions
- Preventing changes to the company's articles of association
- Blocking the waiver of pre-emption rights on new share issues
What are the rights of a shareholder in the UK?
Shareholders have voting rights, dividend rights, rights to information, and rights to participate in decisions affecting the company. They may also have additional rights granted by the articles or shareholders’ agreement.
What rights do shareholders have in a private limited company?
They have statutory rights under the Companies Act and additional contractual rights set out in the articles and shareholders' agreement. Private companies often restrict share transfers and rely heavily on internal governance documents.
Can minority shareholders be forced out?
Yes, in certain limited circumstances, such as under drag-along rights, but minority shareholders also have strong protections, such as unfair prejudice petitions.
What percentage can block a resolution?
- 25% blocks special resolutions
- 50% blocks ordinary resolutions
What rights do shareholders have to company information?
They can access annual accounts, certain registers, general meeting minutes, and other statutory records.
