Important veto rights for shareholders

When investing into a company, especially as minority shareholder, it’s vital to protect your interests. Remember that whilst the shareholders own the company, the directors have day to day control. If you are not a director and don’t have the power to change or remove directors (it is worth seeking to ensure that you do

Home » commercial law » Important veto rights for shareholders

When investing into a company, especially as minority shareholder, it’s vital to protect your interests. Remember that whilst the shareholders own the company, the directors have day to day control.

If you are not a director and don’t have the power to change or remove directors (it is worth seeking to ensure that you do have the right to do this in the articles but as a minority shareholder the other shareholders may well not agree), at the very least you should insist on a shareholder agreement and to include some veto rights in such an agreement.

The below list are some of the most important potential veto rights to consider. It may be the case that some of your demands for veto are rejected or may need to be watered down. Ultimately, it will depend on how hard you are prepared to push, your percentage stake in the company, whether you have a vital role over and above pure shareholding (such as if you work in the business or contribute elsewhere) the timing of your demand (it will be much harder to try and push through veto rights if not agreed at the outset) and how reasonable the other shareholder(s) is/are.

If you are potentially investing into an existing company and your demands are refused, in some or all cases, you would be well advised to ask why. This process may also enable you to make a more informed decision about the personalities and agendas of other shareholders and/or the directors. Forewarned is forearmed as the saying goes!

Potentially important veto rights

Changes to the nature of the business

Articles of association are often very wide and there is no general restriction on a company carrying out any form of business save for a Regulated business such as in Financial Services or law.

Share capital changes

– to protect minorities from dilution. However there may be a proviso that no shareholder can object solely on the grounds of dilution to the issue of new shares to parties investing in the company at the invitation of the board.

No steps to liquidate the company

– save in the case of insolvency.

Not to sell the business or its assets including land and property

– save in the ordinary course of business or perhaps by reference to a definition of material or substantial assets.

Not to acquire other companies, businesses or assets, including land and property

– this is a veto that may well need negotiation and clear definition as otherwise it can be very limiting.

Loans or guarantees

– likely to require clear drafting and possible give and take on amounts which would be acceptable and to enable the business to function on a day to day business, such as possibly granting credit to customers up to certain values.

Transactions with connected parties

– e.g. management or other contracts with shareholders or other business with which they are associated, otherwise than at arms’ length.

Transfer of shares

– except in accordance with the rules for pre-emption rights set out in the shareholders’ agreement or Articles.

Borrowings

– often subject to a stated limit and usually with exceptions like finance leases, hire purchase, etc

Long-term and/or exclusive agency or distributorship agreements/assignments or exclusive licences of intellectual property

– these agreements can represent important and potentially costly commercial arrangements which are of strategic importance.

Service agreements, senior employee contracts, consultancy contracts and material changes to any already agreed

– the fear here may be that other shareholders may manipulate such agreements to enable themselves or allies to benefit, increase control with key alliances internally and/or reduce profits for dividend..

Long term lease or property commitments

– for land or property and including finance leasing arrangements involving large sums.

Changing auditors or accounting policies

– this might also include bank signatories on cheques, etc

Litigation

– not to start legal disputes over a certain value without consent/input and the same principle applying where the company is a defendant, so that you have some strategic oversight.

dserota-sb For further advice on this issue, please do get in contact with me – this is an area where I enjoy advising and have a lot of experience. 

commercial law • Debbie Serota

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