The day-to-day running of a limited company is the responsibility of directors rather than shareholders. But if you hold shares in a company, what shareholder rights do you have as the owner (or part-owner) of the business?
In this post, we look at the various shareholder rights and extra privileges that come with holding a certain percentage of shares in a UK limited company. Let’s dive in.
The rights of all shareholders
A shareholder with any amount of ‘ordinary’ shares (the most common type of share) will enjoy the following rights in a company:
1. Receive a share certificate
Every shareholder in a company should receive a share certificate no later than 2 months after they agree to take any shares. This applies whether they acquire them following an allotment of new shares or a transfer of existing shares.
A share certificate is like a receipt, serving as proof of ownership. However, under UK company law, the shareholder is not the legal owner of the shares until the company records their details in its register of members.
2. Attend any general meetings
A general meeting is a formal meeting of a company’s members. When any such meeting is arranged, shareholders must be given notice in accordance with the rules set out in the Companies Act 2006.
Most shareholders have the right to attend general meetings. However, certain share classes, such as non-voting shares, may not carry this particular right.
If a shareholder is unable to attend, they have the right to appoint someone as their proxy to act on their behalf at the meeting.
3. Cast votes on certain proposed actions
Shareholders can exert their power and control over the company by voting on certain issues relating to the business. This can be a vote by way of written resolution or a vote at a general meeting by a show of hands or a poll.
If a vote is being done via a written resolution or poll, the number of shares held directly impacts the number of votes that the shareholder gets. For example, if they hold 50% of the company’s shares, they have 50% of the voting rights (with the exception of shares classes that are non-voting or carry more than one vote per share).
4. Receive dividends
Ordinary shares carry equal dividend rights per share. This means that shareholders have the right to receive a portion of the company’s profits as dividends. Their profit entitlement is relative to their shareholding percentage. For example, if a person holds 50% of a company’s ordinary shares, they have the right to 50% of any profits available for distribution.
However, certain types of shares do not carry dividend rights, while others may carry discretionary dividend entitlement or only provide dividends under specified conditions. These share classes include management shares, alphabet shares, and deferred shares.
5. Transfer shares
The right to transfer ownership of shares allows shareholders to sell or give away their shares to other people. This liquidity is a key factor differentiating company shares from investments such as real estate.
When holding shares in a company with model articles of association, shareholders may transfer their ordinary shares at any time, subject to the director approving such transactions.
6. Exercise pre-emption rights
Pre-emption rights allow shareholders to buy newly available shares proportionate to their existing shareholdings before the company offers them to other people (e.g. other members or potential investors).
These rights of first refusal help protect shareholders’ interests by enabling them to maintain their shareholding percentage upon the issue of new shares. Another benefit of pre-emption rights is that existing members can restrict external investors or inexperienced family members of other shareholders from obtaining new shares in the company.
The Companies Act 2006 provides statutory pre-emption rights to existing shareholders on the allotment of shares but not on the transfer of shares. However, companies can amend their articles accordingly to remove or alter this provision or to also provide pre-emption rights on the transfer of shares.
7. Inspect company and director information
This includes looking into the company’s register of members and directors’ service contracts. Shareholders should also be sent a copy of the annual accounts as and when they are prepared for Companies House and/or HMRC.
8. Bring a claim against a director
If a shareholder believes that a company director has demonstrated negligence or a breach of duty, contract, or covenant, they can pursue various claims against that director in such circumstances, including a ‘derivative claim’.
The Companies Act 2006 sets out the general duties of a director owed to a company. These are as follows:
- Act within their powers, in accordance with the company’s articles of association, only exercising those powers for the purposes for which they are conferred
- Promote the success of the company for the benefit of its members as a whole
- Exercise independent judgment and act impartially
- Exercise reasonable care, skill, and diligence when carrying out their duties
- Avoid conflicts of interest
- Refuse to accept benefits or inducements from third parties
- Declare any interest in proposed transactions or arrangements of the company
9. Receive a final distribution of capital
On the winding up of the company, shareholders have the right to any surplus funds (pro-rata to their shareholdings) remaining after all debts and taxes have been paid. However, where a company issues different share classes, capital distribution rights on winding up may not apply to certain shares.
What rights do minority shareholders have?
A minority shareholder is someone who holds less than 50% of the shares in the company. If two or more shareholders ‘team-up’ and their combined number of shares reaches the percentage required, they too have the right to carry out the below actions.
A minority shareholder can:
Call a general meeting (at least 5% of shares required)
If a shareholder has enough shares, they have the ability to request the organisation of a general meeting.
Propose a written resolution (at least 5% of shares required)
A written resolution is a resolution that members can pass in writing rather than at a general meeting. The written resolution can be a special or ordinary resolution (more on these shortly).
Call for an audit or poll (at least 10% of shares required)
A shareholder can force an audit in regard to a company’s accounts or demand a poll in regard to a proposed resolution.
Stop short-notice meetings (more than 10% of shares required)
General meetings that have been arranged with a short notice period (14 days’ notice should be given for a private limited company) can be stopped by a shareholder.
Stop squeeze-outs (more than 10% of shares required)
As defined in the Companies Act 2006, a squeeze-out ‘enable[s] a successful bidder to compulsorily purchase the shares of remaining minority shareholders who have not accepted the bid.’ A shareholder with enough shares has the ability to stop this.
What rights do majority shareholders have?
A majority shareholder is typically someone who holds more than 50% of the shares in the company. Again, if two or more shareholders ‘team-up’ and their combined number of shares reaches the percentage required, they too have the right to carry out the below actions.
A majority shareholder can:
Pass ordinary resolutions (more than 50% of shares required)
An ordinary resolution is typically used in situations relating to dividends, shares, and appointing and removing directors. A shareholder with enough shares has the ability to propose an ordinary resolution.
Pass special resolutions (at least 75% of shares required)
A special resolution is used for sensitive matters such as changing the company’s articles of association or winding up the company. A shareholder with enough shares has the right to put a special resolution through.
The Companies Act 2006 and your articles of association
The Companies Act 2006 defines your rights as a shareholder. However, it’s also important to consult your company’s articles of association to check if the shareholder rights have been modified (this is permitted).
The articles of association is a publicly available document that outlines how a company should operate. The majority of UK private companies use the default model articles, while owners choose to amend this version before and/or after incorporation.
If you don’t recall whether your articles of association have been altered, you can complete a quick check using the Companies House search the register tool. To find this information, you will need to view your company’s ‘Filing History’ tab.
Check the shareholders’ agreement (if you have one)
The shareholders’ agreement is a legally binding document between a company’s shareholders. Unlike the articles of association, there is no legal requirement to have a shareholders’ agreement in place.
However, if you do, check it over to ensure there are no particular clauses in regard to your shareholder rights.
Does it matter what type of shares I have?
Yes it does. Different share types come with caveats in regard to what a shareholder can and cannot do. For example, if someone holds non-voting shares, they do not have the right to vote on company resolutions.
For simplicity’s sake, everything covered in this post was written for a shareholder (and company) where only ‘ordinary’ shares are in issue. This is the most common scenario for a private limited company.
You can check the type of shares you hold on your share certificate or the register of members.
Must directors do what shareholders tell them?
The simple answer (and an admittedly frustrating one) is yes and no. The directors are there to work for the benefit of the company (the shareholders). Indeed, this is one of their duties.
Shareholders can direct directors to do something or refrain from doing something. However, directors do have a duty to exercise independent judgment.
Directors may not be able to fulfil their various duties if they don’t think for themselves. But ultimately, if a director frustrates the wishes of a shareholder, and that shareholder holds more than 50% of the shares in the company (or is working with other shareholders to get over 50%), they have the power to remove the director.
So there you have it – you should now know your shareholder rights
We hope you’ve found this post helpful. If you have any questions about your shareholder rights or anything else related to limited companies, please don’t hesitate to get in touch via a comment.
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