Minority shareholders: what are your rights?

The Companies Act 2006 grants shareholders certain basic rights. If a company has standard articles of association (the written rule book which governs the running of the company), the rights afforded to minority shareholders are as follows:

Shareholders holding 25%+

Shareholders holding 25% or more of the shares in the company have the power to block some key decisions the company may wish to make, as these decisions require a 75%+ majority (passed by way of a ‘special resolution’). For example, and amongst other things, the minority shareholder(s) may prevent the company;

• amending the company’s articles of association;
• disapplying statutory pre-emption rights on a new share issue; and
• approving the purchase of a company’s own shares out of capital.

Shareholders holding from 15% to 5%

Even shareholders who are unable to block the passing of a special resolution may have the right:

• to object to a variation of class rights – 15%;
• to request that the company’s accounts undergo a full company audit. This applies even if the company is otherwise exempt – 10%; or
• to call a general (shareholder) meeting of the company and table one or more resolutions of their choosing – 5%.

Further, typically members of a private company must be given at least 14 days’ notice of a general meeting. This notice period can be shortened with the approval of at least 90% (or in some cases, 95%) of the company’s shareholders.

Statutory claims

Shareholders may also be entitled to bring a claim for unfair prejudice or a derivative action, purely by virtue of being a shareholder and irrespective of the size of their shareholding.

Unfair prejudice

Unfair prejudice arises where the affairs of a company prejudice the members generally or a specific group and is designed to protect minority shareholders. If the shareholders feel they have been unfairly treated, the minority shareholders can bring an unfair prejudice claim seeking relief against the acts of the controlling directors/shareholders of the company.

If successful, the court has a wide range of powers which include:

• to regulate the conduct of the company’s affairs;
• to require the company to refrain from an act, or to carry out an act that it has omitted to do; or
• to require the shareholders (or the company) to purchase the shares of other shareholders.

Derivative action

A derivative action claim permits the shareholders to commence legal proceedings on behalf of the company in an attempt to remedy a wrong committed by the directors/shareholders – for example, as a result of negligence, default, breach of duty or breach of trust. Such claims can only be pursued if certain requirements are fulfilled, and the court has wide discretion to examine the merits of the claim and to determine whether or not a derivative claim is appropriate in the given circumstances.

The nuclear option

If there has been a fundamental and irreparable breakdown in the relationship between the shareholders and the company’s directors, any shareholder who has held their shares for at least 6 out of the last 18 months may present a winding-up petition against the company, which provides that the company should be wound up by the court if “the court is of the opinion that it is just and equitable”. Typically, the court will only make an order to wind up the company if no other remedies are available.

Before any action is taken or a petition is issued to the court, we would always advise that shareholders obtain legal advice beforehand if you are a shareholder who may feel that one of the above options is necessary at this time.

If you would like guidance or clarification on any issues about minority shareholders, then please get in touch with our corporate and commercial team.

Our solicitors in Brighton, Eastbourne, London, Hastings and Uckfield can help you understand your options.