Minority shareholders are often kept in the dark when it comes to the financial or operational sides of the businesses’ they’ve invested in. It can be difficult for minority shareholders when they feel the company they have invested in is not being transparent and they have no way of knowing how their investment is performing. Minority shareholders may not have secured a board or observer seat and so decisions are made without them.
Below, we list some key rights and next steps for you to take to protect your position as a minority shareholder.
A shareholder, even a minority shareholder, may be able to effect certain steps depending on their level of shareholding. A minority shareholder holding over 25% of voting shares can block special resolutions of the company from passing, and a shareholder holding over 5% of the voting shares in the company can require a written resolution be circulated to all shareholders.
Directors have broad powers to act under their own discretion so long as they are acting for the benefit of the company and its members as a whole. This may change if there are contractual obligations under a shareholders’ agreement or certain decisions which require shareholder approval under the Companies Act 2006.
Directors also do not have to keep you informed of all decisions they make, unless it is a specific matter requiring your shareholder consent, whether at law or under the Companies Act 2006.
Under the Companies Act, all shareholders have a right of first refusal where new shares are to be issued. If this is to be disapplied it must be done via shareholder resolution after approval by the directors. As above, all members are entitled to have shareholder resolutions circulated to them.
The company’s register of members must be made available to all shareholders, allowing a minority shareholder to inspect and see if further shares have been issued, whether in contravention of the right of pre-emption or otherwise.
Shareholders may propose an ordinary resolution to remove a director, though this requires special notice and the director in question is to be given the opportunity to respond. As this requires an ordinary resolution, a minority shareholder may not be able to pass this resolution by themselves, but can certainly bring it to the table for other shareholders to consider, so long as the correct procedure is followed.
If you want to find out more, we’ve published a useful guide on how to remove a director, covering everything you or others need to know about how to remove a director from a private company in a number of different situations.
This can sometimes lead to a ‘chicken and egg’ situation. How does a minority shareholder know if the directors are acting in their interests if they do not have a right to know all the decisions that the directors are making? If there is a possibility that there is a claim – but you do not have the information yet – our director and shareholder disputes team may be able to assist in asking for the relevant information. In the event that such information is not forthcoming, our dispute team may also be able to advise you in bringing a formal claim to determine if your position has been prejudiced.
If you feel that your rights as a shareholder are being compromised, we’ve put together a comprehensive guide on shareholder remedies to set out what your shareholder remedies are, when they are available and what you as a shareholder can do to be able to use them.
We are fully equipped to advise clients as to the terms of their investment, and the contractual rights they will have thereafter, at or before the point of investment. We can also advise minority shareholders after this point to determine what rights they may have. Contact our corporate solicitors on 0800 689 1700 or fill out our enquiry form.
About our expert
Callum is a senior corporate solicitor at Harper James, specialising in mergers and acquisitions and investments, as well as other corporate/commercial matters.
