Under English law, without a shareholder agreement or enhanced articles of association, a majority shareholder in a private limited company holds considerable power.
Risks for minority shareholders
Minority shareholders should seek to protect their interests to avoid risks which, with standard articles and no adequate shareholder agreement, commonly include:
- Ordinary resolutions – majority voting rights means the ability to pass ordinary resolutions at general meetings, affecting vital control functions such as dividend payments, appointing directors, and approving transactions.
- Board of director control – majority shareholders can control the board of directors by electing board members who align with their interests. This gives them significant influence over company strategy and decision-making.
- Dividend policy – the ability to influence the distribution of profits by proposing and voting for preferred dividend payment schedules. Where majority shareholders are also directors they may manipulate the position so that they receive payment as directors but no dividend is paid.
- Financial control – the ability to decide on highly significant financial transactions such as borrowing, investments, or acquisitions, without reference to all shareholders.
- Dilution – the ability to potentially dilute minority shareholders’ ownership percentage by issuing new shares or raising capital, especially if pre-emption rights are not present.
- Information – where the majority shareholders are also directors or effectively appoint the directors, they will have access to information on the day to day running of the business and finances which can be denied to minority shareholders.
- Appointment and removal of directors – the ability to appoint and remove directors, potentially weakening the voice of minority shareholders by removing those representing their interests.
- Control on value of minority shareholders shares – can be impacted by the majority shareholders deciding to issue preferential shares or other different classes of shares or manipulating the position so that on sale of the company, the minority do not receive fair value for their shares.
With standard articles what sort of important matters require 75% of the shares?
Under standard articles of association in a UK private company, certain resolutions require a special majority of 75% or more of the votes cast to be passed. These resolutions typically involve significant changes to the company’s structure, operations, or financial arrangements.
Examples of company resolutions requiring a special resolution under standard articles include amendments to Articles of Association, changing share capital structure or voting rights, removing a director or displacing Pre-emption Rights
How to protect minority shareholder rights
The 2 key ways for minority shareholders to seek to protect themselves are :-
Shareholder agreement – a strong agreement with explicit clauses covering your rights, responsibilities, and exit options. Negotiate hard for protections at the time you buy into the business.
Articles of association – negotiate amendments to the standard articles to incorporate specific protection clauses like pre-emption rights, dividend preferences, or limitations on board powers.
Specific protections will often involve :-
- Information & Transparency – more than the minimum legal requirements and including regular financial reports, business updates, and access to key documents like board minutes and management accounts and potentially the right to attend board meetings to stay informed about decision-making processes.
- Veto rights – on critical decisions like any amendment to the articles of association that could dilute your voting rights or ownership percentage, major asset sales, mergers, or significant borrowing exceeding a pre-determined threshold. This prevents your interests from being overridden on crucial matters.
- Drag along rights – without drag-along rights, a majority shareholder selling their holding might leave minority shareholders stuck with their shares in a company with new ownership or unclear future direction. Drag-along rights force the buyer to purchase the minority shares on the same terms as the majority, providing a guaranteed exit and liquidity, with minority shareholders receiving the same proportionate price as the majority when the company is sold.
For further information on the issues raised, please contact Martin Donoghue at: md@branchaustinmccormick.com
Branch Austin McCormick LLP
32 St James’s Street
London
SW1A 1HD
