When a shareholder invests money into a company, they obtain certain rights as a result. Generally, the more money invested, the more rights that shareholder has.
Shareholder rights in the UK are dictated by the Companies Act 2006, the company’s Articles of Association, the terms of issue of shares, and any shareholders’ agreement.
What are shareholders’ rights?
When a shareholder invests money into a company, they are entitled to certain rights in relation to that company. These rights increase the more money that is invested, giving that shareholder more control within that company and more power over any major decisions made by the company.
The shareholders collectively own the company; however, they are not responsible for the day-to-day running of the company, which is the role of the company directors. The bundle of rights given to a shareholder therefore allows their voice to be heard to some extent. These rights are contained in the Companies Act 2006, as well as in the company’s constitutional documents: the Articles of Association, any shareholders’ agreement, and the terms of the issue of shares, which are usually contained in the Articles, but can be found in a separate resolution.
The Articles of Association set out how a company is run and governed and are always required on the incorporation of a new company. They are a way in which shareholders can exert some control over the company directors, as decisions can only be made with the agreement of the majority of the shareholders. The Articles can also be amended and updated by a majority shareholder vote. They should cover various issues, including the directors’ powers and responsibilities, the appointment and removal of directors, directors’ indemnity, recording directors’ decisions, the liability of shareholders (also known as members), members’ rights to make decisions, how shares are issued and transferred, the classes of company shares (if allocating others in addition to ordinary shares), and the production of share certificates.
Although most companies issue only ordinary shares, others may issue different types of shares and with these may attach different shareholders’ rights, which are set out in the Articles of Association. UK law is flexible and therefore allows a company to create any class of shares it decides upon and what rights are attached to each.
What are the basic rights of a shareholder?
The Companies Act 2006 sets out the basic rights of shareholders. Usually, updated Articles of Association and a shareholders’ agreement will extend these rights to prevent them from being too restrictive.
The basic rights under the legislation, however, are as follows:
The right to attend general meetings and vote
Shareholders have the right to receive notice of all AGMs (Annual General Meetings) and EGMs (Extraordinary General Meetings) and attend them. If a shareholder cannot attend a meeting, they can ask a proxy to attend in their place and vote on their behalf. Generally, shares carry one vote each; however, this is not always the case: some shares may be non-voting shares and carry no vote at all; some may give the shareholder multiple votes per share, and some may only give voting rights in particular circumstances. Shareholders also have a right to requisition a general meeting and to have a written resolution circulated amongst the members.
The right to receive company accounts and other company documents
Shareholders have a right to receive copies of both a company’s annual report and its annual accounts when they are issued and can request copies at any time. They no longer need to be distributed at an AGM. Shareholders also have a right to receive copies of written resolutions put forward by either the directors or the shareholders. Although shareholders will likely receive other documents from a company, such as updates on company developments, they have no right to receive any other documents and cannot, for example, have access to the directors’ management accounts. Similarly, there is no legal right for a shareholder to receive a physical share certificate; however, most companies will issue them anyway and a company’s Articles of Association may, in fact, require them. Shareholders do have the right to be listed in the company’s Register of Members as proof of their shareholding.
The right to inspect the company’s statutory books and constitutional documents
The Companies Act 2006 also gives shareholders the right to review some of the company’s documents, including the Articles of Association and Memorandum of Association, being the company’s constitutional documents, as well as the Register of Members, Directors’ service agreements and indemnity provisions, and records of resolutions and minutes of meetings.
The right to receive a share of the company’s profits
A company usually chooses to pay out any profits to its shareholders by way of dividend payments. A dividend can only be paid from profits, but a company is not obliged to pay a dividend, even when it is profitable. Where a dividend is paid, it will usually be a fixed amount per share (and in the absence of any contrary provision in the Articles of Association, this will be the case), although this can vary; occasionally a share class might not have a right to dividend payments at all or only when certain conditions are met. Shareholders cannot exercise a vote to increase the dividend payment recommended by the company directors.
The right to receive a final distribution on a winding up of the company
If a company is wound up, any assets should first be used to pay off any creditors. Any remaining assets must then be distributed amongst the shareholders. This is usually done in accordance with the number of shares a shareholder owns in the company. Such distribution may also be done in two stages, firstly a return of capital, and secondly a distribution of surplus capital. Again, however, it may be the case that different share classes have different distribution allocations.
Owners of a company are also offered some protection on the winding up of the company by the “responsibilities of directors” under the Companies Act 2006.
The right to expect that the company be run lawfully
Shareholders also have the right to expect that the company in which they have invested their money is run lawfully, in accordance with the Companies Act, the general law and the constitution of the company.
What are minority shareholders’ rights?
The basic rights of all shareholders are as above. The more shares a shareholder owns, the more rights in the company they will have. Minority shareholders, those who own less than 50% of the share capital, still have relatively little control over a company and are at the mercy of the majority shareholders; it is often difficult enforcing their rights when up against a shareholder with a larger stake in the company. However, even a 5% holding offers additional rights to the basic rights of every shareholder. The following gives a breakdown of all shareholders’ rights over and above the basic rights.
- Shareholding between 5-9%: Shareholders have a right to request a general meeting if one has not been held in the past 12 months. They can also require a proposed written resolution or a written statement in relation to a proposed resolution to be circulated amongst the members at least one week ahead of the relevant general meeting.
- Shareholding between 10-24%: A shareholder has the additional right to have a company’s annual accounts audited. They can also call a poll vote at a general meeting and block consent to any general meeting called at short notice.
- Shareholding between 25-49%: Shareholders can block a special resolution if they own at least 25% of the share capital. A special resolution is one which requires a 75% majority vote.
- Shareholding between 50-74%: At this stage, if a shareholder owns at least 50.01% of the share capital, they become a majority shareholder and have more power in the company. They are able to pass or block an ordinary resolution, which is one which requires a simple 50.01% majority vote. Decisions which can be made by ordinary resolution include any item of routine business where the Companies Act 2006 requires approval of the matter by the members in a general meeting as well as altering the authorised share capital and payment of a final dividend. The proposal of some ordinary resolutions must be made with special notice to the company, including the removal of a director and the appointment or removal of an auditor.
- Shareholding between 75-89%: Shareholders with a 75.01% holding can pass a special resolution. Notice of at least 21 days specifying the intention to propose a special resolution must be given to the members. Special resolutions are needed for any amendment to the Articles of Association, a change of company name, a reduction or increase of share capital, the re-registration of the company in another capacity, or the winding up of the company, either voluntarily or by the court. Any special resolution must be made fairly and with proper purpose to avoid a petition of unfair prejudice being brought against the majority shareholders.
- Shareholding of 90% of more: Shareholders can consent to and hold a general meeting on short notice. They can also squeeze out minority shareholders during an acquisition provided a fair offer has been made.
- Any shareholder with a 100% shareholding in the company has all of the above rights and can do anything they wish. In other words, they have full control of the company.
In addition, a shareholder is given pre-emption rights if new shares are issued in the company. This is effectively a right of first refusal to obtain these new shares before they are offered to third parties. Such right allows them to maintain their percentage shareholding in the company. A company must offer these new shares to the existing shareholders in the same proportions of the ordinary share capital already held by them. Such offer must remain open for at least 14 days. If all new shares are not taken up by the current shareholders, they can then be offered to third parties, on the same, or less favourable, terms than those offered to the shareholders. These pre-emption rights do not apply on an ordinary sale of shares by a shareholder.
Owning shares in a company is usually a great way of investing money and getting a return on that investment. However, it is always advisable to be aware of the rights a shareholder might gain on investing, by reading the company’s Articles of Association, shareholders’ agreement, and terms of share issue, as these set out how a company is run and governed; these documents also often amend and extend the basic rights given to shareholders under the Companies Act 2006.
Minority shareholders will often be protected by the terms of the shareholders’ agreement which might include a dispute resolution clause as well as the protection afforded by the unfair prejudice clauses under the Companies Act 2006.
Every shareholder, regardless of the size of their shareholding within a company, is entitled to have their voice heard.
Shareholder rights FAQs
[wp-faq-schema accordion=1]
Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
