Shareholder Powers in a Company - 8 FAQs

Here you can download our Shareholder Powers In A Limited Compnay 8 Frequently Asked Questions answered booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

Limited Companies in England and Wales are managed by parties separate to those who have a financial interest in the success of the Company.

The managers, or Directors, of a Limited Company will make all executive decisions as regards the business, its finances, its operations and all other issues relating to the running of the business and its success, including its expansion and the acquisition of property (subject to some statutory limitations).

Alternatively, the investors (or owners) of the Company (Shareholders) each hold a specific amount of the fixed pool of shares in the Company but have no day-to-day involvement in the Company and do not have any entitlement to remuneration. They will be responsible for all decisions relating to the structure of the Company, including the rights and obligations of Shareholders and Directors, the constitution of the board (subject to Directors’ powers to recruit co-Directors) and the disposal of assets to connected parties.

Quite often in small and medium size companies the Shareholders and Directors are the same individuals, or have many common representatives.

The power of individual Shareholders is often dependent on the amount of shares they own (i.e. the proportion of the Company they own) and personal relationships between the respective Shareholders. Majority Shareholders are those with more than 50% of shares and minority shareholders generally refer to those having 50% or less shares. A 50% share is not a majority because it must be more than 50% to constitute a majority.

1. Where Do Shareholders Powers Originate From?

A source of Shareholders powers is generally found within the Constitution documents for a Company, which in England and Wales is referred to as the Articles of Association (“the Articles”) and Memorandum of Association. The latter document is rarely a source of reference, but the Articles are very important as they define the powers of Shareholders, the powers of Directors and general restrictions applicable to the Company.

The Articles can of course be amended by a Shareholders Resolution, and the amended document must be registered at Companies House and, together with the Shareholder Resolution, retained within the Company’s accounting records so that there is an accurate record of such changes to the Articles.

The other source of reference is the legislation provisions, most importantly the Companies Act 2006 and various other regulations which have been annexed to this very large piece of legislation. As well as this there are the Companies Acts that have been passed over the course of the last century which will often contain a vital element of relevant to the Articles, often referred to as Table A, dependant on when the Company was incorporated.

2. What Is A Shareholders Agreement?

A Shareholders Agreement is a private contract between Shareholders of the Company. It binds all such shareholders to any such agreement, together with the Company.

A Shareholders Agreement is a private document and is not registered at Companies House and therefore is not something available for public view and the use of it therefore depends greatly on the Shareholders who are a party to it retaining a copy and being aware of its existence (as they can often be forgotten or overlooked after some years).

A Shareholders Agreement is a very useful tool and will cover a whole range of situations relevant to both the Shareholders’ interests and the operation of the Company, and may govern what the Directors can and cannot do, what entitlements each of the Shareholders should receive, who is entitled to any shares sought to be sold by any of the Shareholders and how any legal or other remedies should be dealt with.

The aim of a Shareholders Agreement is to prevent or minimise the effect of any disagreement, any deadlock which may cause the Company problems and any risk to third parties as a result of disagreements between either Shareholders or management.

The potential content of the Shareholders Agreement is too large an issue to be covered in this article but, in summary, if there is any bespoke arrangement you require in respect of your interest in a company, this can be reflected in a Shareholders Agreement.

A Shareholders Agreement is a very technical document and accordingly we strongly recommend that you seek legal advice when drawing one up. We often see scribbled notes or even more comprehensive documents which Shareholders often seek to rely on. For a number of reasons, these documents are often partially or entirely unenforceable.

3. Common Disputes That Arise In A Company

Most small to medium size companies often lead to a conflict between individual Directors or Directors/Shareholders.

Common disputes that arise often include a complaint by one Shareholder/Director that another one is either removing or taking more income in excess of the other’s drawings, or his/her role is not as originally expected, the business is not going in the agreed or preferred direction, assets are being diverted to someone’s personal interests or to a corporate entity which was not agreed, or there is just a complete inability to make decisions within the Company.

A commonly encountered situation is where Shareholders, who at the outset were unwilling to allow the other Shareholder too much control, have equal 50/50 shareholdings and find themselves unable to reach any agreement on business or financial decisions, or even Shareholder Resolutions as regards such matters, for example dividends.

This is often referred to as “Shareholder Deadlock” and is a great source of dispute between shareholders who often are very emotionally involved and may in some situations not be considering the pragmatic aspects of the situation. Please read our booklet entitled “Company Deadlock – the Options” for more information on these matters.

4. What Risks Do Shareholders Face?

When a dispute arises between Shareholders (who may often also be Directors), whilst emotionally at war with each other they may lose focus on their primary concern, i.e. the Company.

We often see a lot of situations where disputes arise that severely damage the Company and accordingly both Shareholders (who may also be Directors) could as a result be in breach of their fiduciary duties to the Company.

In such circumstances, where the two Directors fail to promote the success of the Company, a Minority Shareholder could potentially sue them personally for the damage caused by this distraction.

In the alternative, if the Directors are not causing losses to Shareholders generally, then it may be that their actions are incurring losses to third parties (most particularly Creditors) who will likely be less sympathetic to their personal concerns and have greater legal remedies available, including those against the Company itself.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. What Legal Action Can Be Taken Against A Co-Director?

6. What Is The Court's Attitude?

7. How Does A Shareholder Or Director Exit A Company?

8. What Is The Nuclear Option?

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.