The government, in partnership with the pensions industry, is to trial a new initiative designed...
23 FAQs about ownership issues.
- What are my rights as a shareholder in a private limited company?
- Can different shareholders have different rights?
- As a minority shareholder, am I protected against being treated unfairly?
- Are there any key proportions of shares that affect my rights?
- If an outside investor takes shares in the company, would my rights be affected?
- Can I prevent shares being sold to other investors?
- What are my obligations and liabilities as a shareholder?
- As a shareholder, what right do I have to choose the company's directors?
- Can the shareholders overrule the board of directors?
- Do I have any rights as a company director?
- What are a company's articles of association?
- Does a company need to have a shareholders' agreement?
- If the company offers someone else shares at a lower price than I was asked to pay, can I complain?
- If an employee or director leaves the company, can they be forced to give up or sell their shares?
- Can I stop another shareholder transferring their shares to someone else?
- Can I transfer shares to another member of my family and can this reduce my tax bill?
- What happens to my shares when I die?
- How can I enforce my rights?
- Are all partners in a partnership equal?
- What are the key terms in a partnership agreement?
- What happens if there is no written partnership agreement?
- What rights do I have if I lend money to a business?
- Do I need any special documentation if I lend money to a business?
1. What are my rights as a shareholder in a private limited company?
Under company law, your main rights are:
- to be sent important information, such as the annual report and accounts
- to inspect the various registers the company keeps, such as the register of directors
- to see a copy of the company's memorandum and articles of association
The company's articles (see 11) and any shareholders' agreement (see 12) may give you additional rights. The company's articles usually include what rights are attached to shares. Typically, holders of ordinary voting shares have the right to:
- attend shareholder ('general') meetings
- vote at general meetings
- receive a dividend (if one is declared)
- receive a proportion of anything left over if the company is wound up
Note that your basic rights may include little or no control over how the company is managed, unless you (or a group of shareholders acting together) own a significant proportion of the voting shares (see 4).
2. Can different shareholders have different rights?
The company's articles (see 11) may allow the company to issue different classes of shares. For example, some companies issue both voting and non-voting shares. This can be useful if you want to issue shares to other investors but retain voting control.
As a shareholder, you will only have the rights attached to the class of shares that you own. However, different shareholders holding the same class of shares all have the same rights.
3. As a minority shareholder, am I protected against being treated unfairly?
Legally, yes. The directors of the company are required to treat all shareholders fairly.
In practice, the situation can be less straightforward. Other shareholders may exert significant control over the board's decisions. Trying to prove that these decisions are unfair or having them overturned can be difficult, and can lead to long and costly court cases.
You will be better protected if there is an appropriate shareholders' agreement (see 12).
4. Are there any key proportions of shares that affect my rights?
Broadly speaking, the key percentages are as follows. (The detailed position is slightly more complicated if not all classes of share carry the same voting rights.)
- 75% - you can force through any resolution at a general meeting of the shareholders, including a special resolution. Changes requiring a special resolution include altering the company's articles - the main constitutional document setting out how the company is to be run.
- Over 50% - you can force through an ordinary resolution at a general meeting of the shareholders. One crucial power that this gives you is the power to force through an ordinary resolution to appoint or, importantly, dismiss directors (see 8). You therefore have effective control of the management of the company.
- Over 25% - you can block any special resolution.
- 5% - you can require the company to call a general meeting. You can prevent the compulsory purchase of your shareholding following a takeover of the company. You can apply to the Department for Business, Energy & Industrial Strategy for the appointment of an inspector to investigate the company.
These percentages apply to either a single shareholder or a group of shareholders acting together.
5. If an outside investor takes shares in the company, would my rights be affected?
Your rights may be affected if:
- new shares are issued by the company to the investor, so reducing the percentage of the company which you own
- the new investment is accompanied by changes to the company's articles, or to any shareholders' agreement
For example, an outside investor may want a first right to a proportion of any dividend paid by the company, before you and the other shareholders get your dividend. Or they may want special voting rights that allow them to block or veto certain actions by the company, such as diversifying into a new business, issuing new shares or employing new directors or senior managers over a certain salary.
In practice, a more important effect may be a change in what the other shareholders want. For example, a venture capitalist who invests in the company may want to be able to realise their investment in three years' time. This might lead the investor to push the directors to follow a very different strategy, such as growing the company until it can be floated on a stock exchange.
6. Can I prevent shares being sold to other investors?
In general, you can only prevent shares being sold to other investors if the company's articles of association (see 11) or any shareholders' agreement (see 12) give you that right. This can happen in three ways:
- 'Pre-emption' rights may apply in the articles of association. In other words, if the company issues new shares, they must be offered to existing shareholders first, in proportion with their shareholdings. Pre-emption rights like this can usually only be overruled by a special resolution - which requires the approval of 75% (by voting rights) of the shareholders who vote.
- The articles of association may also include restrictions on the transfer of existing shares. The articles might, for example, give the directors the right to refuse to register the transfer of shares to another investor.
- A shareholders' agreement might include restrictions on the sale or transfer of shares. For example, the agreement might require any shareholder who wishes to sell shares to offer them first to existing shareholders.
7. What are my obligations and liabilities as a shareholder?
Under company law, your obligations and liabilities are minimal. If you own shares which are not yet paid for, or only partially paid, you may be required to pay the balance at some specified date or if the company goes into liquidation.
Of course, you may have significant obligations and liabilities if you have entered into a shareholders' agreement or some other contract. For example, if you have personally guaranteed the company's debts.
8. As a shareholder, what right do I have to choose the company's directors?
This depends on the company's articles. Often new directors may be appointed by the board. Alternatively they may be appointed at a shareholders' (general) meeting.
If directors are appointed at a shareholders' meeting, they must usually be nominated either by the board of directors or by a shareholder. Shareholders who wish to nominate a director must give notice of their intention to make the nomination, within strict time limits.
The directors may refuse to call a shareholders' general meeting to consider a shareholder's nomination. However, shareholders with at least 5% of the voting rights can require that a general meeting be held.
Alternatively, more specific rights to choose directors may be included in the articles of association.
A majority vote of the shareholders is always effective to remove a director from office, (though, if they have a service agreement, the director may be entitled to damages for wrongful or unfair dismissal). Shareholders must follow a special procedure to remove a director or their decision is not legally valid, so legal advice is strongly advised.
9. Can the shareholders overrule the board of directors?
Under company law, there are only a limited number of decisions which require shareholder approval: for example, making amendments to the company's articles of association, and putting the company into voluntary liquidation. The company's articles of association may give the shareholders further rights to take decisions. Otherwise, decisions are made by the directors and cannot normally be overruled.
Some of the decisions that have to be approved by the shareholders need to be passed by a majority of the votes cast at the shareholders' meeting. These are called 'ordinary resolutions'. Others require a 75% majority of the votes cast. These are called 'special resolutions'.
You can also take action if you think the directors are treating you unfairly or acting illegally. However, this can be a difficult process (see 3).
In general, shareholders do not have the right to directly overrule the directors. However, shareholders with at least 5% of the voting rights can require the company to call a shareholders' general meeting, and to consider their chosen resolution. This resolution could address a specific decision which the shareholders wish to overturn. Alternatively, the resolution could be aimed at replacing the existing board with new directors who are expected to take decisions with which the shareholders agree (see 8).
10. Do I have any rights as a company director?
If you are an employee of the company you will have employment rights. Alternatively, if you have a service contract you will have whatever rights are given by that contract.
As a director, you also have the right to be given advance notice of all directors' meetings. The company's articles of association will usually state that you must also be notified of any shareholders' meeting.
In any case, you have the right to be notified of any meeting at which a motion to dismiss you will be voted on. You have the right to put your case at that meeting. But mostly as a director you have duties and responsibilities.
11. What are a company's articles of association?
The company's articles of association are the constitution of the company - the rules by which it is run.
They may include restrictions on the company's 'objects' - the purpose of the company. If there are no restrictions, the company may do anything that is lawful.
The articles define the rules which the directors must follow: for example, how new directors are to be appointed and how many directors there must be. In private companies, the articles often include restrictions on the sale or transfer of shares. They also usually include what rights are attached to shares (see 1).
When a company is formed, the founders can choose to have the articles drawn up in a way which helps to protect their interests. Subsequent changes to the articles of a company can only be made by a special resolution of the shareholders, with at least 75% of the votes in favour.
12. Does a company need to have a shareholders' agreement?
A shareholders' agreement is not a legal requirement. However, for private companies it is almost always a good idea.
In practical terms, drawing up a shareholders' agreement is a good opportunity to work through key issues - such as what the company's strategy will be and what will happen if a founder wishes to retire or sell his shares.
A shareholders' agreement is generally a more effective way of dealing with this type of issue than the company's articles.
13. If the company offers someone else shares at a lower price than I was asked to pay, can I complain?
It depends on the circumstances.
For example, as a shareholder you have the right to be treated fairly. It may not be reasonable for the company to offer shares to you at one price and to another shareholder at a lower price.
As an employee, the share offer might form part of your remuneration. In this case, your rights will depend on your employment contract. They will also depend on the particular scheme the company is using.
Of course, over time a fair value for the company's shares is likely to change. It might well be appropriate to offer shares at a different price now to the price used a year ago.
14. If an employee or director leaves the company, can they be forced to give up or sell their shares?
In general, shareholders can only be forced to give up or sell shares if the articles of association or some contractual agreement include this requirement.
In practice, private companies often have suitable articles or contracts so that the remaining owner-managers retain control if an individual leaves the company. For example, the articles or contract may say that, if a shareholder wants to dispose of their shares, they must offer them to the other shareholders (usually in proportion to the shares that each already holds) before they can dispose of them to anyone else. In such circumstances, the employee or director may, dependent on the circumstances in which they have left, be entitled to receive a 'fair value' for the shares - often determined by the company's accountants if it cannot be agreed any other way - or may merely be entitled to the nominal value of the shares (eg £1).
The shareholder may have a claim against the company or the other shareholders if they can show that they have been unfairly treated.
15. Can I stop another shareholder transferring their shares to someone else?
The articles of association of a private company, or a shareholders' agreement, can include restrictions on the transfer of shares. The usual restriction is that the directors can refuse to register a proposed transfer - although they must only do so if it is for the long-term good of the company - in legal jargon, if it promotes the long-term success of the company.
16. Can I transfer shares to another member of my family and can this reduce my tax bill?
In principle, yes, unless the transfer is ruled out by the company's articles of association or a shareholders' agreement.
However, the tax position can be complicated.
- The transfer may give rise to a capital gains tax liability (though transfers to your spouse do not).
- You should not transfer shares directly to a child under the age of 18, though there are various other options such as holding the shares in trust for a child. The dividends on any shares transferred to the benefit of a child by a parent may still be taxed as the income of the parent.
- Transfers of shares, or the issue of new shares by a company you control, to your spouse need to be handled carefully. HM Revenue & Customs may challenge them if they are clearly part of a tax-reduction strategy.
Take professional advice on whether and how you could reorganise shareholdings to reduce your tax liability.
17. What happens to my shares when I die?
This depends on the company's articles of association and any shareholder agreements. For example, the company might have the right to buy the shares back from your estate (ie the assets you leave when you die). Apart from that, the shares will form part of your estate. Depending on the overall value of your estate, there may be a liability to inheritance tax. Professional advice and careful tax planning can help to minimise any liability.
18. How can I enforce my rights?
This depends on the circumstances. For example:
- if other shareholders have breached the terms of a shareholders' agreement with you, you might be able to sue them
- if the directors have failed to meet their responsibilities or have acted outside their powers, the company might be able to take legal action against them
- if the company has failed to repay money it owes you, you might be able to sue the company or to instigate insolvency proceedings
- if you are an employee of the company, you might be able to take legal action to enforce your employment rights
- you might be able to negotiate a solution with other shareholders or directors without litigation
In private companies, one of the more common disputes centres around being treated unfairly as a shareholder - usually because you are a minority shareholder. In practice, the court's usual remedy is to order the company or the other shareholders to buy your shareholding at a fair price - rather than interfering directly in the management of the company.
As with all litigation, take professional advice on the most appropriate proceedings, timescales, costs and the likelihood of success. Wherever possible, minimise the risks by using suitable clear, written agreements in the first place.
19. Are all partners in a partnership equal?
In the absence of any partnership agreement or other evidence to the contrary, all partners in a partnership are treated equally.
20. What are the key terms in a partnership agreement?
There are several areas to consider.
A good partnership agreement will provide a clear statement of what the partnerships' objectives are and how it will be managed. This should include what each individual's responsibilities are, how decisions will be taken and so on. Working through these issues, and preparing a written agreement, will help to minimise the risk of any subsequent dispute if partners disagree.
The partnership agreement should clearly spell out what capital each partner will contribute, how the partnerships' profits (or losses) will be shared among the partners, and how much money partners will be entitled to draw from the partnership.
The agreement should also include such issues as whether the partnership is intended to be indefinite, the arrangements for introducing new partners, and what will happen if a partner dies or wishes to resign.
21. What happens if there is no written partnership agreement?
Unless there is evidence to the contrary, all the partners will be entitled to an equal share of the partnership's income and an equal say in management. They will also all be 'jointly and severally' liable for the partnerships' debts. That means that, if one or more partners cannot or will not pay, the remaining partners still have to pay the whole of the partnership debts, not just 'their' proportions.
22. What rights do I have if I lend money to a business?
Your rights depend on what has been agreed. Typically they include the right to stated amounts or levels of interest, and repayment at a specified date or after a given period of notice. If your loan is secured against assets of the business, you may also have the right to benefit from the value of those assets if the business cannot pay its debts.
If the business fails to meet its obligations to you, you may be able to sue the business or instigate insolvency proceedings.
23. Do I need any special documentation if I lend money to a business?
You need documentation as evidence of the loan and of the terms under which it was made. If your loan is secured against assets of the business, you may be unable to enforce that security without documentary evidence.