Minority shareholder protection
"Gannons were excellent. They fought to ensure that our rights were respected. They are intelligent lawyers and a pleasure to work with".
We specialise in minority shareholder rights, how to value the shares, tax, and useful strategies to deploy for a fair result in any negotiation
We specialise in minority shareholder rights, advising on how to protect those rights and the strategies to deploy for a fair result in any negotiation as part of a dispute where directors or controlling shareholders have abused their position. We explain what can be done.
Please do call us to discuss your position.
Basic minority shareholder rights
The Companies Act does give all shareholders certain basic rights. But, rights and protections afforded to minority shareholders under the Companies Act are very limited (see below) and do not deal with a multitude of common situations which apply in companies.
The most common problem for minority shareholders in a private company is where the directors of the company are the majority shareholders or appointed by them. In this situation, the minority shareholders have virtually no say on decision making and very limited visibility on financial information. The majority shareholders can easily manipulate things to their advantage,
The way to enhance minority shareholder rights is via the articles or a shareholders’ agreement. There is no limit on the extent of enhancement over and above the Companies Act that is possible. It is all a matter of knowing what rights you will need and what you can agree.
Based on past experience we find the most common problems we are asked to solve include:
- Reviewing investment agreements and shareholders’ agreements to enhance the rights and protections for minority shareholders;
- Resolving minority shareholder disputes;
- How to prevent abuse of power by directors and/or controlling shareholders.
Rights with standard articles and under the Companies Act
If the company has standard articles issued upon incorporation and no amendments have been made, in all likelihood your shareholder rights will be limited to the basic rights set out below :-
Shareholding of 5% or more
- Able to require the circulation of a written resolution.
- Able to require the company to call a general meeting.
- Able to prevent the deemed re-appointment of an auditor.
Shareholding of 10%
- Able to call a poll vote at a general meeting.
- Able to require an audit.
Shareholding greater than 10%
- Able to block consent to short notice of a general meeting.
Shareholding greater than 25%
- Able to block a special resolution.
- Able to block compromise arrangement with members or a class of members.
Shareholding of 50%
- Able to block ordinary resolutions.
Shareholding greater than 50%
- Able to pass an ordinary resolution.
Shareholding of 75%
- Able to pass a special resolution.
- Able to approve compromise or arrangement with members or a class of members (also needs court sanction to be effective).
Shareholding greater than 90%
- Able to consent to short notice of a general meeting.
- Able to squeeze out minority shareholders where a takeover offer has been made.
- Right for minority shareholders to be bought out by a bidder making a takeover bid.
Protecting rights of minority shareholders
Any of the above powers available under the Companies Act can be improved for the protection of any or all shareholders under the articles and/or shareholders agreement.
When a dispute arises, it is often too late to amend the articles to cover minority shareholder rights. Amendment to any set of articles requires at least 75% of the shareholders to vote in favour of the amendment. In cases of dispute, it is fair to assume that the majority shareholders will not be willing to pass a resolution to assist a minority. This leaves the aggrieved shareholder with only the limited statutory rights.
Time and cost can be saved if minority shareholder protection is agreed via the articles or a shareholders’ agreement before the shares are acquired. Common issues to consider to enhance shareholder protection include :-
- Information rights – often minority shareholders suspect the business is not being managed properly or beiing run solely for the benefit of major shareholders but lack evidence. All claims need evidence. Controlling shareholders and directors will often refuse to voluntarily disclose information. In practice, one of the most important provisions to include for a minority shareholder is the right to access financial records and management accounts. The right to see financial data will not arise automatically under the Companies Act but can be created via the articles or shareholders agreement.
- Power of veto – minority shareholders can, with suitable changes to the articles or shareholders agreement, be given powers of veto. A power of veto can be used to block actions unless the minority consents. For example, a minority shareholder could be given the power to block business sales and mergers, expenditure above prescribed limits, winding up or voluntary liquidation or large scale investment.
- Dilution of shares – Under the Companies Act shareholders are given the right to subscribe for shares under any new share issue. In some companies this right is disapplied in the articles or shareholders’ agreement. In other cases the shareholder may not be able to subscribe and hence suffer dilution – wealthy shareholders may use this power to drown out minorities by fixing artificially high subscription prices. Minority shareholders should look at dilution and building in protection when they invest.
Dispute Resolution mechanisms
Minority shareholders should think about their likely exit route when they invest and agree how they will be able to dispose of shares. Shareholder problems can often be solved quickly and effectively if the shareholder agreement includes a dispute resolution clause. There are a variety of approaches to take. We will work with you to pick the right approach for your shareholding. Common items to include in a shareholder agreement to protect minority shareholders include :
- Bringing in a third party (mediator) in an attempt to reach an amicable settlement if shareholders are in dispute;
- Including a right for a minority shareholder to have his shares bought out; or
- Controlling the transfer of shares to avoid them being transferred into undesirable hands.
- Valuing shares on exit – the Companies Act does not deal with how shares will be valued where there is a share sale by private agreement of a personal shareholding. For example, it has to be taken into account the lack of influence a minority shareholding may carry or is the value to be based on a whole company valuation – the parties will have to argue that out in the absence of a written agreement.
The Companies Act does not provide any mechanism by which the company can force the sale of shares. A range of problems can arise if share transfers are not dealt with in the articles or shareholders’ agreement. One of the biggest problems is that the whole company could be unsaleable as a potential buyer cannot be certain all shareholders will sell.
Minority shareholder legal remedies
There will usually be a variety of ideas to explore for a minority shareholder. Our job is to work out the minority shareholder rights and then to present them in a persuasive way. The core rights to explore are:
- Blocking a sale of the company if there are no drag along rights agreed
- The possibility of an unfair prejudice claim;
- Bringing a claim against the director(s); or
- Winding up or voluntary liquidation.
Legal protections for shareholders in the Companies Act and under case law are thin. Ensure you get the protection you need.