Minority shareholders are individuals or organisations that own less than 50% of a company’s shares. While they may not have the power to control the company’s operations, they still have certain rights that protect their interests. These rights are essential for ensuring that minority shareholders are not left out of important decisions that affect the company’s future.
In this blog article, we’ll explore the concept of minority shareholder rights, including what they are, why they matter, and how they can be enforced.
Whether you’re a minority shareholder or a company owner, understanding these rights is essential for ensuring a fair and transparent business environment.
What is a Minority Shareholder?
A minority shareholder is any individual or entity that owns less than 50% of the shares in a company. Minority shareholders can be private individuals, institutional investors, other companies, or other types of business organisation.
When making company decisions, directors and shareholders may be entitled to vote in order to make sure that the decision has the required legal approval. These decisions might include the issue of new shares, or the approval of a new expenditure.
Minority shareholders will only be able to block certain types of shareholder resolutions or shareholder votes. This is because most resolutions only need a simple majority, where anything more than 50% will mean the vote will pass. These types of resolutions are called “ordinary resolutions” and mean that a lot of major decisions can be carried out without any input or approval from minority shareholders.
There are also special resolutions that require a 75% majority in order to pass. In these cases, depending on the percentage of their shareholding, minority shareholders may be able to block or demand changes to a resolution before they vote for it. Special resolutions are usually about more significant company issues, and might include changing the name of the business or changing the company’s Articles of Association.
Minority Shareholder Rights
In the UK, the Companies Act 2006 gives all shareholders some basic rights. However these can be very limited in practice and minority shareholders will have no real say in the management of the company and most major decisions can be made without them.
In accordance with the Companies Act, minority shareholders in private companies with less than 25% of the voting rights can call a general meeting, prevent the deemed automatic re-appointment of an auditor, require an audit, or call a poll at a shareholder meeting. It is only when they have 25% or more (but still less than 50%) of the votes that a minority shareholder (or group of minority shareholders acting together) can block special resolutions.
What Types of Rights Are Available to Minority Shareholders?
Statutory Rights for Minority Shareholders
As mentioned above, the Companies Act is the principal way minority shareholders are protected under UK law. If a company has standard articles of association, with no additional amendments for minority shareholders, it is likely that their rights will be limited to what is in the Companies Act. Therefore it’s important for minority shareholders to also understand their statutory and legal rights.
The basic rights in the Companies Act are:
- For those with a shareholding of 5% or more. You have the right to require the circulation of a written shareholder resolution; you can call a shareholder meeting; you can prevent the automatic deemed re-appointment of an auditor.
- For those with a shareholding of 10%. You can call a poll vote at a general meeting (under which votes are counted by reference to voting shares held rather than on a show of hands); you have the ability to require an audit for a company which is otherwise exempt from the requirement to have audited accounts.
- For shareholders with more than 10% shareholding. You are able to block consent to short notice of a general meeting.
- For those with more than 25%. As we mentioned earlier, you’ll be able to block any special resolutions.
There are also some statutory remedies (unfair prejudice and derivative claims) that minority shareholders may be able to use, which are discussed later on in this article.
Contractual Rights for Minority Shareholders
A shareholder’s statutory rights can be improved and enhanced for the advantage of all shareholders, not just the minority shareholders. This can be done either through non-standard articles of association or a shareholders agreement (or a combination of both).
Some common issues for minority shareholders to consider include:
- Rights to information. A shareholder’s right to access or receive financial records and management accounts is not something that is protected under the Companies Act. This is often seen as one of the most important provisions for minority shareholders to add, both to ensure that they receive regular financial information but also if they suspect that the company is not being managed properly.
- Right to appoint a director. As we’ve said, a minority shareholder has very limited power over the day-to-day management and running of a company. Minority shareholders often request a provision in the shareholders agreement that allows them to have a more significant say in day to day matters by having the right to appoint a director.
- Rights to be offered new shares. These are called pre-emption rights, and mean that a minority shareholder will be given the right to acquire any new shares that are being issued before they are offered to other third parties. Under the Companies Act, pre-emption rights can be disapplied by a special resolution and a minority shareholder will often require additional protection that any disapplication also requires the minority shareholder’s specific approval
Other Frequently Asked Questions About Minority Shareholders
Can majority shareholders remove a minority shareholder?
Generally speaking, no. The shareholders agreement or articles of association may require that a minority shareholder’s shares are subject to compulsory sale if the minority shareholder has breached the agreement or articles of association or has suffered an event such as bankruptcy or death. Employee shareholders are also often subject to leaver clauses, under which they are obliged to offer their shares for sale if they are no longer employed by the company, with the sale price being dependent on whether the employee is a good or a bad leaver.
What are tag along rights?
Tag along rights protect minority shareholders when a majority shareholder sells their shares. Tag along rights entitle the minority shareholder to sell their shares at the same time and to get the same price for their shares as the majority. They therefore are “tagging along” on the sale and are getting the same value for their shares as the majority holder.
What are drag along rights?
Drag along rights are the opposite of tag along rights, and enable a majority shareholder to force all minority shareholders to sell to a third party who wants to purchase the whole company. The minority shareholders still get the same price for their shares as the majority shareholder.
What is unfair prejudice?
Unfair prejudice arises when the management of a company is being conducted in a manner which is unfairly prejudicial to the interests of some or all of the shareholders. This could include a majority shareholder who controls the board transferring company property or opportunities to another company under their control, or breaching their duties as directors under the Companies Act. The remedy for unfair prejudice is a petition to the court for an order which (if the unfair prejudice is proved) is usually that the majority shareholder must purchase the minority shareholder’s shares for their fair value.
What is a derivative claim?
A derivative claim is made against directors for a breach of their duties, commonly negligence or a conflict of interest where the director has personally benefited. The claim is made by a shareholder in the company’s name against the director. With the consent of the court, minority shareholders can look to sue the directors on behalf of the company, usually if the majority shareholders who control the board prevent the company from taking action.
Protecting Minority Shareholders with Paper Rock
PaperRock provides several different document templates, including shareholder agreements and articles of association that are easy to use and simple to personalise. Each document is accompanied by a guidance note which explains its purpose and how it should be completed and used. Visit our document library today to find out more.