Shareholders’ Rights in UK Limited Companies

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Limited company shareholders in the UK have a broad range of legal rights provided by the Companies Act 2006 and the company’s articles of association (or resolution) and shareholder agreements. As a shareholder in (or member of) a company, it is essential to understand your rights and how these change as your shareholding changes over time. In this article we will explain the main rights of shareholders in UK limited companies.

What are the rights of all shareholders?

Under the Company’s Act 2006 (CA 2006) all shareholders in limited companies are entitled to certain rights regardless of the percentage of their shareholding. These include the right to:

Inspect key documents, registers, and agreements

All shareholders have the right to inspect key company documents, registers, and agreements. These include the company’s Register of Members (section116), director’s service agreements (section 229), director’s indemnity provisions (section 238), the record of resolutions and minutes of general meetings (section 358) and any constitutional documents, including the memorandum and articles of association and shareholder agreements. Under section 423 of the CA 2006 shareholders are entitled to receive a copy of the company’s annual accounts at the end of each financial year.

Bring a claim against a company director or file a petition

Shareholders have the right to bring a derivative claim for relief against a director on behalf of the company under section 260 of the CA 2006 if they believe that a director is in breach of duty or trust or is guilty of negligence or default. This includes claims against former directors and shadow directors.

Furthermore, under section 994, company shareholders have the right to apply to the court for an order on the grounds:

  1. that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself/herself), or
  2. that an actual or proposed act or omission by the company (including an act or omission on its behalf) is or would be so prejudicial.

Receive notice of, attend, vote, and appoint proxies in general meetings

Under section 310 of the CA 2006 shareholders must receive notification of and have the right to attend general company meetings, including Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs). This right does not extend to company director meetings.

Shareholders have the right also to vote on company resolutions at general meetings. Voting rights depend on the class of shares held and the provisions contained in the articles of association (section 284). It is important to bear in mind that non-voting shares do not confer voting rights, some shares confer the right to multiple votes and other shares may confer only limited voting rights.

Shareholders may also nominate proxies to attend, speak and vote on their behalf at a general meeting (section 324).

Receive share certificates and register members

Shareholders have the right to receive share certificates (which may be in electronic or paper form) once their shares have been allotted. These certificates should be issued within two months (section 769). New shareholders have also the right to be added to the register of members (section 113).

What are the rights of all shareholders based on their shareholding?

Under the Companies Act 2006 additional rights are provided to shareholders based on their shareholding, as follows:

Rights of those members who hold at least 5% of the shares

Right Relevant Section of CA 2006

Require circulation of a written resolution.

 

Section 292:

“(1) The members of a private company may require the company to circulate a resolution that may properly be moved and is proposed to be moved as a written resolution.”

Call a general meeting.

Section 303:

“(1) The members of a company may require the directors to call a general meeting of the company.”

Require circulation of a statement relating to a matter in a proposed resolution that is to be put to or dealt with at a general meeting.

Section 314:

“(1) The members of a company may require the company to circulate, to members of the company entitled to receive notice of a general meeting, a statement of not more than 1,000 words with respect to—

  1. a matter referred to in a proposed resolution to be dealt with at that meeting, or
  2. other business to be dealt with at that meeting.”

Can prevent re-appointment of an auditor.

Section 488:

“(1) An auditor of a private company is not deemed to be re-appointed under section 487(2) if the company has received notices under this section from members representing at least the requisite percentage of the total voting rights of all members who would be entitled to vote on a resolution that the auditor should not be re-appointed.”

Rights of members who hold at least 10% of the shares

Right Relevant Section of CA 2006

Right to demand a poll

Section 321:

“(1) A provision of a company’s articles is void in so far as it would have the effect of excluding the right to demand a poll at a general meeting on any question other than—

  1. the election of the chairman of the meeting, or
  2. the adjournment of the meeting.”

Require an audit of financial accounts

Section 476:

“(1) The members of a company that would otherwise be entitled to exemption from audit under any of the provisions mentioned in section 475 (1) (a) may by notice under this section require it to obtain an audit of its accounts for a financial year.”

Rights of members who hold more than 10% of the shares

Right Relevant Section of CA 2006

Can block consent to the short notice of a general meeting

Section 307 [Summary]: Private companies can raise the required percentage to agree to short notice up to a maximum of 95%. This means that a shareholding of greater than 5% will be sufficient to block consent to a short notice general meeting.

Can prevent service of “squeeze out” notices on a takeover offer.

Section 979:

“Squeeze out” refers to the compulsory sale of shares of minority shareholders. This can be blocked by shareholders with more than 10% of the shares.

Rights of members who hold more than 15% of the shares

Right Relevant Section of CA 2006

Right to object to variation of class rights.

Section 633:

“(2) The holders of not less in the aggregate than 15% of the issued shares of the class in question . . . may apply to the court to have the variation cancelled.”

Rights of members who hold more than 25% of the shares

Right Relevant Section of CA 2006

Can block special resolutions.

 

 

Section 283:

Special resolutions must be passed by 75%, hence a shareholder with more than 25% of the shares can block such a resolution: “(2) …members representing not less than 75%

of the total voting rights of eligible members.”

Can block compromise or arrangement (scheme of arrangement) with members or a class of members.

Section 899 [summary]: Schemes of arrangement are a statutory procedure whereby an agreement is reached between a company and its members or creditors. This is typically necessary to restructure finances or prevent insolvency. Shareholders with greater than a 25% shareholding can block such arrangements.

Rights of members who hold 50% of the shares or more

Right Relevant Section of CA 2006

Block or pass ordinary resolutions.

Section 282:

Those with 50% shareholding have the power to block an ordinary resolution: “(1) An ordinary resolution of the members (or of a class of members) of a company means a resolution that is passed by a simple majority”. Likewise, a person with greater than a 50% shareholding can pass an ordinary resolution.

Rights of members who hold 75% of the shares or more

Right Relevant Section of CA 2006

Pass special resolutions

Section 283:

“(1) A special resolution of the members (or of a class of members) of a company means a resolution passed by a majority of not less than 75%.”

Approve compromise or arrangement with members or a class of members (also needs court sanction).

Section 899:

“(1) If a majority in number representing 75% in value of the creditors or class of creditors or members or class of members…agree on a compromise or arrangement, the court may, on an application under this section, sanction the compromise or arrangement.”

Rights of members who hold 90% of the shares or more

Right Relevant Section of CA 2006

Can consent to the short notice of a general meeting (this applies to non-traded companies only).

Section 307:

“(4) A general meeting may be called by shorter notice than that otherwise required if shorter notice is agreed by the members.”

“(6) The requisite percentage is— (a) In the case of a private company, 90% or such higher percentage (not exceeding 95%) as may be specified in the company’s articles.”

Can squeeze out minority shareholders if a takeover offer has been made.

Section 979:

Shareholders with 90% of shares can approve the compulsory sale of the business (“squeeze out”).

Other rights of company shareholders

As explained above, company shareholders hold additional rights over and above those conferred by the CA 2006. These are contained in the company’s articles of association and shareholder agreement. Articles of association form a compulsory founding document created during a company’s incorporation (i.e. registration) which sets out how the company will be run. In respect of shareholders, articles may contain shareholder provisions such as voting in general meetings and the right to receive dividend payments.

Shareholder agreements may provide further shareholder rights, including provisions on additional voting rights, rules on the transfer of shares, the rights of minority shareholders, and the investment value of their shareholding. In some cases, shareholder agreements may provide veto rights that can be used to block actions.

Final words

As the rights of company shareholders can change over time as their shareholding increases or decreases, it is common to find that members do not understand the level of control that they have. Having a complete picture of all of your rights as a shareholder at any given time will ensure that you can protect both your interests and those of the company.

Uniwide Formations specialises in the registration of limited companies and LLPs. We provide also a wide range of related professional business services, including the issuing and transfer of shares.

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