Minority Shareholder Rights and Their Protection

All shareholders in a limited company are given certain rights and protections by the law, but those applicable to minority shareholders are minimal. The Companies Act 2006 does not deal with numerous scenarios that companies face on a daily basis involving minority shareholders.

Both companies and minority shareholders should be proactive and act before issues occur; the best way to do this is to set out in writing the rights and obligations of all parties. The articles of association and shareholders’ agreements, which are the documents governing a company’s affairs and the relationship between shareholders respectively, are, after all, private contracts that can be negotiated and agreed by all parties – it’s just a matter of knowing what you may need and what to ask for.

The most common situations that our clients ask us to advise on involve reviewing investment and shareholders’ agreements from a minority shareholders’ perspective, negotiating their rights and protections, and advising on how to minimise majority shareholders’ abuse of power.

Some standard protections that we advise our minority shareholder clients to consider involve:

Anti-dilution provisions

These provisions enable a minority shareholder to participate in any new proposed issue of shares. In their absence, the minority shareholder may not be able to subscribe for a new share issue and therefore suffer dilution of their shareholding.

Rights of access to information, mainly financial information

The right to access financial information, such as management accounts, does not arise automatically under the Companies Act 2006. Minority shareholders should ensure that this right is granted to them as rarely will controlling shareholders agree to share financial records with minority shareholders voluntarily, especially when the latter have suspicions about how the company is being managed.

Veto powers

These powers are given to minority shareholders to block certain decisions unless they provide their consent. Such matters could include approving a further issue of shares, altering the company’s articles of association, varying the rights attached to the minority shareholders’ share class and winding-up the company.

Tag-along rights

If there is a proposed sale, under which the majority shareholders purport to sell their shareholding at a certain price, tag-along rights confer the right for minority shareholders to join in the transaction and sell their shareholding on the same terms.

There are always remedies available if a minority shareholder’s rights are breached but they could lead to lengthy and costly litigation. The parties, and especially minority shareholders, should consider matters in advance and agree in writing at the outset each party’s rights, obligations and protections.

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