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16 November 2019

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What Are the Rights of a Shareholder in a Private Limited Company?

Posted by: Julian Bond

Owning shares in a company can be a great way to invest your money if you understand the rules. Purchasing shares is not a straightforward process and you need to be aware of your rights, especially if you find the company you have invested in is making decisions you do not agree with.

The amount of shares you own ultimately reflects how likely you are to have your voice heard, but everyone who has a financial stake in a company still has a right to have their say.

In this blog, we will look at the rights of a shareholder in a limited company as outlined in the Companies Act and through articles of association, how to have your voice heard and how to protect your rights.

The Importance of Articles of Association

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Articles of association are the documents that set out how a company is run, governed and owned, and is one of the key ways shareholders can exert control over company directors.

In essence, the articles restrict what directors are able to do without having the majority support of the shareholders. What’s more, having a shareholders’ agreement will allow for the articles to be updated to improve how the company is run and governed, providing the majority of shareholders agree.

Articles of association should cover the following:

  • The directors’ powers and responsibilities
  • Retaining a record of the directors’ decisions
  • The directors’ indemnity
  • The appointment and removal of directors
  • The liability of members
  • Members’ rights to make decisions
  • How shares are issued and transferred, the class of each share and the production of share certificates

Articles of association are required under the Companies Act for whenever a new company is formed in the UK. Therefore, these should be available for you to read over before you decide to make an investment.

If you are unsure whether the articles will provide you with suitable rights or not, you should double-check with an experienced solicitor before investing. Likewise, if you are already an investor, a solicitor will be able to explain what rights you have as a shareholder should you have an issue that needs to be raised.

Basic Rights of Shareholders

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The Companies Act provides all shareholders with rights, but without updated articles of association or a shareholders’ agreement, your rights are likely to be very restricted.

Under the Act, the following is a breakdown of shareholder rights:

All shareholders

  • To be given notice of shareholder meetings (referred to as general meetings)
  • To vote at a general meeting
  • To enter a company’s Register of Members
  • To be issued a share certificate
  • The right to review minutes of a meeting
  • To inspect the directors’ service contracts

Shareholding between 5-9%

  • All of the above
  • To request a general meeting if one has not been called in a 12 month period
  • To require a written statement for a general meeting to be circulated

Shareholding between 10-24%

  • All of the above
  • Able to call a poll vote at a general meeting
  • Able to call an audit
  • Can block consent to a short notice general meeting

Shareholding between 25-49%

  • All of the above
  • The right to block a special resolution

Shareholding between 50-74%

  • All of the above
  • Able to pass or block an ordinary resolution

Shareholding between 75-89%

  • All of the above
  • Can pass a special resolution

Shareholding 90% or Greater

  • All of the above
  • Able to consent to a short notice general meeting
  • Can squeeze-out minority shareholders during an acquisition (providing a fair offer has been made)

As you can see, the more shares you have in a company, the more rights you ultimately have. Enforcing your rights can be made difficult by a shareholder with a greater stake than you, so contact a solicitor if you believe your rights are being ignored.

Protecting and Enforcing your Rights

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For minority shareholders, it can be difficult to gain more rights without investing more in the company, but as we already discussed earlier, you can use articles of association to have more say.

You will need the majority of shareholders to agree before changes can be made to an article. Therefore any changes you wish to introduce must be for the benefit of the company and not just a few individuals. Otherwise, your suggestion will be ignored as it is unlikely the majority will pass a resolution to assist the minority.

This rule goes both ways, so if you are worried that company directors will edit articles as they see fit, be rest assured that they will not be able to do so without the majority’s approval.

Alternatively, you can make your voice heard by signing up to a shareholders’ agreement that has a dispute resolution clause included before buying any shares.

Three of the more common dispute resolutions include:

  • Trying to reach an amicable settlement through mediation
  • Allowing a minority shareholder to be bought out
  • Controlling the transfer of shares so no one undesirable gains a say

If you would like to bring these terms to the table, but you do not know the best way to approach the subject, ask an experienced solicitor for advice.

Fighting for your Rights

No matter how many shares you own in a limited company, having a stake in the business grants you the right to have your voice heard. Therefore, it is important that you have a solicitor who will make sure you’re not being overlooked.

At Glaisyers, we are experts in combing through legal documents and translating the jargon.

If you own or are about to buy shares in a company, speak to a member of our team first. We will be able to tell you if your purchase will result in you having difficulty in getting your issues across.

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Julian is head of our corporate department and has practiced law for 30 years. He is highly experienced in advising a wide variety of business on anything from business formation through to multi-million pound deals.

Julian Bond - Corporate/Commercial Partner

To discuss how Glaisyers can assist you contact Julian Bond on Julian.Bond@glaisyers.com or via 0161 832 4666.

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