Shareholders do more than just invest in a company – they hold rights that can directly shape how a business is run. From appointing directors to voting on key decisions, understanding what these rights are (and how they differ between majority and minority shareholders) is essential. In this blog, we look at the key rights and responsibilities of shareholders in a private limited company. We also explain how shareholders can influence the board and the decisions it makes – whether you hold a majority stake or a smaller shareholding.
Shareholder rights and influence
What are the key rights of shareholders in a private limited company?
Shareholders in a private limited company have certain rights under the Companies Act 2006 and under the general law, as well as any additional rights set out in the company’s articles of association or a shareholders’ agreement. These rights can include:
- the right to vote on important company decisions (such as approving changes to the articles, appointing or removing directors or authorising the issue of new shares)
- the right to receive dividends, if and when they are declared
- the right to receive certain information about the company, including its annual accounts
- the right to inspect company records, such as the register of members
- the right to transfer their shares (although this is often restricted)
- the right to participate in any surplus capital if the company is wound up
The exact scope of these rights depends on the company’s structure and governing documents. Some rights apply to all shareholders automatically, while others (like veto rights or enhanced voting rights) might only be available to certain classes of shares or agreed in a shareholders’ agreement.
How do minority and majority shareholders’ rights differ?
Majority shareholders invariably have more control over company decisions simply because they hold more voting power. In many cases, owning more than 50% of the voting rights means they can pass ordinary resolutions on their own. If they hold 75% or more, they can also pass special resolutions – for example, to amend the articles of association or approve certain corporate transactions.
Minority shareholders – those who hold less than 50% of the voting rights – have more limited influence. However, they still benefit from certain legal protections. For example, shareholders holding at least 5% of the voting rights can require the directors to call a general meeting.
In some cases, minority shareholders may also have enhanced rights under a shareholders’ agreement, such as veto powers over specific decisions.
Where minority shareholders believe the majority is acting unfairly or improperly, the law provides remedies – including the right to bring an unfair prejudice claim.
What does “unfair prejudice” mean?
If a company is managed, usually by the majority shareholders, in a way that prejudices the interests of minority shareholders, and that behaviour is unfair, the minority can apply to the court for relief under the Companies Act 2006 under what’s known as an unfair prejudice claim.
The legal test is whether the company’s affairs have been conducted in a manner that is both prejudicial to the interests of one or more shareholders and unfair. It’s a high threshold – but it can be met in a range of situations. Common examples include:
- exclusion from management in breach of an agreement or prior understanding
- misuse of company funds or assets
- directing work, customers or contracts away from the company to a competing business controlled by one or more directors
- the issue of new shares solely with the intention of diluting an existing shareholder’s stake
- failure to pay dividends when there is a reasonable expectation they would be declared
- withholding key financial or operational information from certain shareholders
- using board or shareholder votes to override minority protections set out in a shareholders’ agreement
If the court finds that unfair prejudice has occurred, it has wide powers to grant a remedy – this is usually an order that the majority shareholder should buy out the minority shareholder at a fair value.
What are the responsibilities of shareholders in company governance?
While directors are responsible for the day-to-day running of the company, shareholders play an important role in overseeing and influencing its overall direction. Their main responsibilities relate to decision-making on matters that go beyond the board’s authority – particularly where approval by shareholder resolution is required.
These responsibilities can include:
- appointing or removing directors
- approving changes to the articles of association
- authorising certain transactions (such as the issue of new shares or loans to directors)
- making decisions about dividends and capital structure
Shareholders are also expected to act in accordance with any shareholders’ agreement or voting arrangements they’ve entered into. While they don’t owe the same duties to the company as directors do, larger or controlling shareholders may still have a duty not to act in a way that unfairly prejudices others – particularly where their conduct affects how the company is run.
How can shareholders influence the appointment or removal of directors?
Shareholders will usually have the power to appoint or remove directors. The process, and the percentage of votes needed, will depend on the company’s articles of association and whether a shareholders’ agreement gives any enhanced rights to particular individuals or groups.
In most private companies, the default position under the Companies Act 2006 is that:
- directors can be appointed by an ordinary resolution of shareholders (a simple majority of votes)
- directors can also be removed by ordinary resolution, even if the articles or service contract say otherwise
However, the Act sets out a specific process that must be followed to remove a director. This includes:
- giving special notice of the proposed resolution – at least 28 clear days before the meeting
- ensuring the director is given the chance to make representations in writing and speak at the meeting
- holding a shareholders’ meeting (written resolutions cannot be used to remove a director)
Some shareholders may also benefit from enhanced rights – typically granted in a shareholders’ agreement or attached to specific classes of shares (such as preference shares). These might include:
- the right to appoint or remove one or more directors without a general vote
- the right to veto appointments or removals
- a requirement that certain corporate actions (known as reserved matters), which might otherwise be approved by the board or by shareholder resolution, can’t be taken without their specific consent
These types of rights are often negotiated as part of an investment or shareholders’ agreement and can give minority or institutional shareholders greater influence over the board and corporate decision-making.
In practice, shareholders may also influence directors more informally – for example, by using their voting power to apply pressure or by negotiating board representation as part of wider commercial terms.
Share transfers and exits
What restrictions can be placed on the transfer of shares in a private company?
In private companies, it’s common to place restrictions on how and when shares can be transferred. These restrictions are usually set out in the articles of association or a shareholders’ agreement, and are designed to control who can become a shareholder and to protect the existing ownership structure.
Typical restrictions include:
- pre-emption rights: existing shareholders have the right of first refusal if someone wants to sell their shares
- board approval: a transfer may require the approval of the board of directors
- tag-along rights: if a majority shareholder sells their shares, minority shareholders can insist on selling their shares on the same terms
- drag-along rights: if a majority shareholder agrees to sell, they can require minority shareholders to sell too
- lock-in periods: share transfers may be restricted for a fixed period, such as during a start-up’s early years
- compulsory transfer provisions: certain classes of shareholders, typically employees, can be required to sell their shares in the company if they cease to be employed
Without these restrictions, shareholders are generally free to transfer their shares, subject to the company’s constitution and any contractual arrangements.
How is the value of shares determined when a shareholder wishes to sell?
There’s no fixed formula for valuing shares in a private company. The method used is typically set out in the articles of association or shareholders’ agreement, particularly where there are compulsory transfer provisions.
Common valuation approaches include:
- fair market value: determined by an independent valuer
- agreed valuation: based on negotiation or a recent funding round
- formula-based valuation: using net asset value, revenue or EBITDA
- valuer appointment clause: allowing an independent expert to determine the price if the parties can’t agree
The valuation method can significantly affect what a shareholder receives, especially in a compulsory sale. An employee shareholder who ceases to be employed will often be categorised as a good leaver, in which case they may receive fair market value, or a bad leaver, in which case they may only receive nominal value for their shares.
It’s important to check the shareholders’ agreement and articles of association before starting the process.
If you’re putting a shareholders’ agreement in place or reviewing your company’s governance structure, our template library includes expert-drafted documents designed to guide you through the process clearly and cost-effectively.
When things go wrong: disputes and remedies
What can we do as shareholders if we are unhappy with the board and want a shareholders’ meeting to be held?
If shareholders are concerned about how the board is running the company, they have the right to call a shareholder (general) meeting – provided they meet certain thresholds.
Under the Companies Act 2006, shareholders holding at least 5% of the company’s voting rights can serve a formal request on the company, asking the directors to call a general meeting.
The request must:
- be made in writing
- state the general nature of the business to be discussed
- be signed (or otherwise authenticated) by the relevant shareholders
Once the request is received, the directors must call a general meeting within 21 days, to be held within 28 days of the notice. If they fail to do so, the shareholders themselves can call the meeting and recover any reasonable costs from the company.
Calling a meeting doesn’t guarantee that a resolution will pass. Shareholders should carefully consider whether they have enough support before taking this step.
What remedies are available to shareholders in cases of unfair prejudice?
If a shareholder believes the company is being run in a way that harms their interests – and that the conduct is unfair – they can petition the court under section 994 of the Companies Act 2006 for relief. This is known as an unfair prejudice claim.
To succeed, the shareholder must show that:
- the company’s affairs are being (or have been) conducted in a way that is prejudicial to their interests
- the conduct is unfair — either because it breaches a legitimate expectation, or departs from agreed standards of fairness
The court has wide discretion when granting a remedy. The most common outcome is an order requiring the majority to buy out the affected shareholder’s shares at a fair value.
These claims are often used where there has been:
- exclusion from management in breach of an agreement or prior understanding
- misuse of company funds or assets
- directing work, customers or contracts away from the company to a competing business controlled by one or more directors
- the issue of new shares to dilute an existing shareholder’s stake
- failure to pay dividends when there is a reasonable expectation they would be declared
- withholding key financial or operational information from certain shareholders
- using board or shareholder votes to override minority protections set out in a shareholders’ agreement
Bringing an unfair prejudice claim is a serious and costly step. Shareholders should take advice early and consider whether negotiation or alternative dispute resolution might offer a quicker, more cost-effective solution.
How can disputes between shareholders be resolved amicably?
Not all shareholder disputes need to end up in court. In many cases, issues can be resolved through open communication, negotiation and a clear understanding of each party’s rights and expectations.
The first step is often to review the shareholders’ agreement and articles of association. These documents may contain procedures for resolving disagreements.
Disputes can often be resolved by:
- renegotiating key terms
- rebalancing decision-making authority
- revisiting dividend or share transfer policies
- bringing in a neutral third party to help facilitate discussions
What is the role of mediation or arbitration in shareholder disputes?
When informal discussions fail, shareholders may choose to turn to mediation or arbitration to resolve disputes without going to court.
Mediation involves an independent third party helping shareholders reach a negotiated solution. It’s confidential, flexible and well-suited to situations where the parties want to maintain an ongoing relationship.
Arbitration is a more formal process in which an independent arbitrator hears both sides and makes a legally-binding decision. It’s considered to be faster than court proceedings and will be a confidential process. Arbitration may be required if the shareholders’ agreement includes an arbitration clause.
Both options can reduce costs, provide a quicker resolution and keep the dispute out of the public eye.
Final thoughts
Shareholders in private companies hold real influence – but that influence depends on understanding both their legal rights and the practical limits of their role. Whether you’re trying to appoint a director, manage a dispute or protect your position as a minority shareholder, knowing how the rules work (and what your documents say) can help you make informed decisions and take an appropriate course of action.
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If you’re putting a shareholders’ agreement in place or reviewing your company’s governance structure, our template library includes expert-drafted documents designed to guide you through the process clearly and cost-effectively.
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