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Shareholder Rights And Disputes

Shareholder Rights And Disputes

Causes of Shareholder Disputes

Many companies become mired in disputes. When people first decide to enter into business together, they naturally believe the venture will run smoothly and successfully.

As a result, they often neglect to enter into a Shareholders’ Agreement. By the time they realise they need one, it’s too late – they’ve fallen out.

It is wrong to suggest that in each dispute there is always a villain and a victim. In our experience this is seldom the case.

Often the shareholders in conflict are two (or more) reasonable people who are arguing because of a misunderstanding of their original intentions. This has arisen because they failed to document an important agreement or a change in their objectives or priorities.

Typical causes of company shareholder disagreements include complaints that:

  • one or more shareholders are not pulling their weight
  • a majority shareholder is neglecting a minority shareholder’s interests
  • shareholders are not being briefed properly on the company’s financial position (particularly if it is in difficulties)
  • there is a conflict of interest.

Majority (Controlling) Shareholder Rights

Your rights as a shareholder in a private limited company are based on the size of your shareholding; the greater your share, the more rights you have.

  • Shareholding of more than 90%
    - You can consent to the short notice of a General Meeting
  • Shareholding of 75%
    - You can pass a special resolution
    - You can approve a compromise or arrangement with members (with court approval).
  • Shareholding greater than 50%
    - You can pass an ordinary resolution (or block one if your shareholding is only 50%).

Minority Shareholders’ Rights And Protection

  • Shareholding greater than 25%
    - You can block a special resolution (or a compromise agreement with members).
  • Shareholding greater than 15%
    - You can object to variation of class rights for the shares.
  • Shareholding greater than 10%
    - You can block consent to short notice for a General Meeting.
  • Shareholding of 10%
    - You can have the company’s annual accounts audited- You can demand a poll even if the articles prohibit it.
  • Shareholding of 5%+
    - You can circulate a written statement or resolution
    - You can require the company to call a General Meeting.

If parties wish to agree to obligations or restrictions that are not included in the company’s articles or enshrined in law, they may enter a private Shareholders’ Agreement.

Shareholders’ Basic Rights

Every shareholder – no matter how few shares they own – has the right to:

  • receive notice of General Meetings and to inspect the minutes
  • ask a court to call a General Meeting
  • not to be unfairly prejudiced
  • a share certificate
  • have their name entered on the Register of Members (and inspect it without charge)
  • inspect the register of directors’ service contracts without charge.

The Minute Books and the following registers must be maintained at the company’s registered office:

  • Register of Directors and Secretaries
  • Register of Members
  • Register of Directors’ Interests in Shares
  • Register of Charges (with copies of all instruments)

Disputes Involving Controlling Shareholders

A shareholder is in control if they own or control more than half of the shares in a company. They could be acting alone or with the support of others.

Some controlling shareholders can misuse their position of power. They can manipulate company finances for their own benefit. Examples include minimising profits (perhaps by taking an excessive salary or a never-to-be-repaid loan from the company) and denying a fair dividend to the other shareholders.

Sometimes they will try to sell their shares on terms that benefit them but that disadvantage the minority shareholders.

50/50 Shareholder Disputes

If two 50:50 shareholders disagree, there will be deadlock unless the chairman of the board has a casting vote.

Every good Shareholders’ Agreement should contain a dispute resolution clause.

This clause will outline how to resolve shareholder disputes. This usually means Alternative Dispute Resolution (ADR) through an impartial third party. It is quicker, less expensive and less stressful than going to court. Taking your fellow shareholder(s) to court should only ever be a last resort.

ADR is still available even if you do not have a Shareholders’ Agreement. But we would always recommend that you get one. Do so as a priority at the start of your business relationship. Later on may be too late.

Can A Majority Shareholder Force A Minority Shareholder To Sell Their Shares?

Not unless the articles or Shareholders’ Agreement includes ‘drag along rights’. These rights enable a majority of shareholders to sell the company – forcing the minority shareholders to sell their shareholdings on the same terms if they are outvoted by the majority. 

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