Minority shareholders and company law
Minority shareholders can generally be outvoted by the majority in relation to important decisions of a company and can therefore suffer prejudice. Much however depends on whether actions have been taken to deliberately prejudice the minority shareholder or shareholders as against the legitimate power and influence which can be used by those who have bought and paid for more shares.
The majority shareholder can be the company’s parent company, an individual or a group of connected shareholders.
Minority shareholders may sometimes feel that their rights have been ignored as often they are dispossessed of any real say in the operation of the company and in some circumstances, the majority may manipulate matters to their advantage, such as policy on payment of dividends, using the company as effectively their own personal vehicle, or to assist related businesses owned by the majority shareholders. The company often favours the majority over minority shareholders, for example it may comprise of non-voting shareholders.
If a minority shareholder has been unfairly prejudiced, the court has a power to make any order it sees fit on an application by an aggrieved shareholder, but such cases are often complex and very expensive, with an uncertain outcome where commonly the damage has already been done, so it is always advisable to deal with the potential risks and issues by way of negotiations on a shareholders agreement or suitable adjustment to the company’s articles of association. Although, there are different remedies available, the court will possibly order the other shareholders or the company to buy the minority shares at a ‘fair value’.
In other cases, the court may wind up the company.
What are the key percentages of shares which are significant for company control?
Generally, the important percentages are :-
- 75 per cent gives power to pass any resolution at a general meeting of shareholders, including a special resolution. It therefore carries with it absolute control of the company, in the absence of alterations to the articles or safeguards in shareholder agreement.
- Over 50 per cent will enable an ordinary resolution to be passed.
- Over 25 per cent provides the ability to block a special resolution.
- A 5 per cent shareholding or more gives the ability to require the company to call a general meeting.
- The above percentages apply whether a single shareholder has the relevant shares or where shareholders act together.
Can restrictions be placed on transferring shares?
The answer to this depends on the provisions of your company’s articles of association or any shareholders’ agreement which is why these documents are so crucial, because when investing in a company, a shareholder will almost certainly want to be given first option, known as a right of pre-emption, if shares become available, so as to maintain his or her percentage of shares or to increase it, before external new investors are allowed in, who could be friends or proxies of other existing shareholders which would alter the control structure of the company. This is why solicitors recommend they are considered when a company is formed or when a new shareholder joins. The usual way to protect your interests is by :-
- Rights of pre-emption – in simple terms if an existing investor wants to sell his, her or their shares must first be offered to other existing shareholders, generally in proportion to their shareholdings, before being sold to new investors.
- The articles of association will commonly, although not with standard articles which have not been altered, incorporate restrictions on transferring shares.
For additional help on all aspects and issues relating to minority shareholdings, don’t hesitate to call or email me.
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