What Rights Do Minority Shareholders Have?
A minority shareholder is, usually speaking, a person holding less than 50% of the voting shares in a company. Minority shareholders have various rights which are protected under the common law or statute, plus additional rights can be obtained using a contract.
The majority shareholders are often presumed to have the controlling influence over a company. This is because they can, by themselves, either vote through ordinary resolutions (if they hold more than 50% of voting shares) or special resolutions (if they hold 75% of more). Minority shareholders can have influence, too, although as expected to a lesser degree. Those with 5% of voting shares, for example, can require the company to call general meetings and circulate resolutions. Those with 10% could demand a poll vote at a meeting, and those with 15% could object to variation of rights in classes of shares. If the minority holds more than 25% of voting shares, they could block a special resolution.
Minority shareholders can seek to protect their rights, as well as acquire additional rights, by using a contract to do so. A common way of doing this is to enter into a shareholders agreement with the other shareholders. Amending the company’s articles of association to provide for additional shareholder rights can also have a similar effect. A common example of a contractual right in a shareholders agreement could include for the shareholders’ unanimous consent to be obtained on certain reserved matters affecting the company, where otherwise this is not needed. Rights of pre-emption and “tag-along” provisions are also common rights provided for in contract. If a party to the contract ignores these rights and takes an action in spite of them, they may well find themselves in breach of contract, which could have serious consequences for them.
It is long-established law that the majority must not conduct the affairs of the company in such a manner so as to unfairly prejudice those in the minority. This is now enshrined in statute, specifically section 994 of the Companies Act 2006. This statute does not define what “unfair prejudice” is, nor does it provide many specific examples of what it might be, so this is therefore something that is very much considered on a case-by-case basis.
An examination of what is and is not unfair prejudice is far beyond the scope of this note. Suffice it to say here that, where unfair prejudice can be demonstrated, the minority shareholder then has the option of petitioning the Court for redress. This may include obtaining an order from the Court for another shareholder (or group of them) to buy their shares off them at a determined value. A more extreme order could be obtained for the winding up of the company, on just and equitable grounds.
So, although minority shareholders are sometimes seen as the underdog in a company, as we have seen they do have rights afforded to them, which could often give them crucial influence in a company’s affairs.
If you are a shareholder and need advice regarding a dispute with the other shareholders of your business, then contact me directly via ieuan.jones@GAsolicitors.com or call 01752 203500.