If you are a minority shareholder in a business, it is important to understand what rights you have and how to protect your interests should the need arise. Our team have been advising minority shareholders since 2002. Let us help you too.

A shareholder’s interest in the company is defined primarily by the number and value of shares they hold, and therefore the percentage of the company that they own. This percentage might also be affected by the type or class of shares held, which may affect voting rights. Voting rights might also be affected if there is an underlying shareholder agreement and shares or voting rights are defined under that agreement.

Shareholders have limited control over the day to day running of a company. The running of the company and the decisions made are predominantly made by the directors. Shareholders do however have the ability to affect some of the decisions of the company.

Shareholders can affect certain decisions by holding a members’ meeting in order to pass resolutions. For example,

To pass an ordinary resolution a majority vote is required in value of more than 50%. A special resolution requires voting of more than 75% of shareholders’ interests. Therefore, shareholders with 50% or less interest in the company are considered minority shareholders because they have, on their own, limited ability to affect matters.

Solutions for minority shareholders

If a minority shareholder believes that their interests are being overridden, they do have some ways in which to protect their interests.

On a practical level, the easiest way for minority shareholders to have a resolution passed is to collaborate with other shareholders and form a group of shareholders who are in favour of the same resolution, and can therefore bring about a vote of more than 50% at a shareholders meeting.

Other methods of improving a minority interest could be the negotiation of increased rights under a shareholders’ agreement.

Shareholders involved in a dispute with the company also have certain methods of redress, such as:-

Shareholders remedies are discussed in more detail in in our web page titled Remedies available.

Unfair prejudice

A shareholder can apply to the court on the grounds that the company’s affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interest of members generally, or to specific members. For full details see our web pages on unfair prejudice/section 994 petitions.

Derivative claim

A director owes duties to the company when the company is solvent, and to creditors when the company reaches insolvency. These are far reaching. Whilst the general duties are owed to the company rather than to individual members, it follows that the company must enforce those duties if a director is in breach. These duties are set out in more detail in our pages on directors fiduciary duties and non fiduciary / public interest duties.

If an individual member believes that a director or directors have breached their duties to the company, but the company doesn’t bring a claim, then they may be able to bring a ‘derivative’ claim, being a claim derived from the rights of the company, on behalf or instead of the company. However, bear in mind that this action is fairly unusual, and might be costly for the shareholder.

Removal of director

Whilst a minority shareholder may not remove a director by themselves, it is possible that they can garner the support of other shareholders to bring a vote of more than 50% at a company’s meeting. For more details of the process see are page on removal of director and sale of shareholding and business.

These remedies are not easy routes for shareholders, and legal advice should always be taken before considering embarking on any of these. At Francis Wilks & Jones we have a proven track record of acting for shareholders in disputes over many years. Contact us to discuss your options if this applies to you.

Exit the company and sell shareholding

A minority shareholder can exit the company if they don’t like the direction that the company is going. The practical issues surrounding a shareholder exiting a company depends on the type of company involved. In a company listed on the stock exchange it is fairly straightforward. Shares can be listed for sale on the stock market. In a private company where there is no recognised share price, then a valuation would need to be made of the shares and a purchaser found.

A further complication is that a pre-emption right might be in place, which will be set out either in the Articles of Association or in a shareholders’ agreement which restricts the disposal of the shareholding in some way. Often this is so that existing shareholders must be offered the exiting shareholding first.

How can I protect a minority interest?

The most effective way of protecting a minority interest is for those interests to be protected under a shareholders’ agreement. This might provide additional rights for minority shareholders, as well as remedies and resolutions if they don’t agree with the direction of the company.

At Francis Wilks & Jones we frequently advise shareholders on their rights and options, and advise companies setting up on the benefits of having a shareholder agreement, which can help to avoid costly disputes between shareholders at a later date. If you would like to discuss any of these issues please contact our friendly team today.

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