Summary
- Minority shareholders (those holding less than 50% of voting rights) have statutory protections that cannot be overridden by a company’s articles of association, including the right not to be unfairly prejudiced by majority shareholders or directors acting improperly.
- Minority shareholders have three main legal remedies available through the courts: unfair prejudice claims (where conduct objectively harms them as shareholders), petitions to wind up the company on just and equitable grounds, and derivative claims brought on behalf of the company where directors have breached their duties.
- Shareholder agreements can provide additional contractual protections beyond statutory rights, such as requiring unanimous board approval before directors are removed, and are enforceable under contract law rather than company law.
- This article is a guide to minority shareholder rights and protections for shareholders and business owners in England and Wales, explaining the legal remedies available when minority shareholders are treated unfairly.
- LegalVision is a commercial law firm that specialises in advising clients on corporate governance and shareholder disputes.
Tips for Businesses
Draft a comprehensive shareholder agreement that includes specific protections for minority shareholders, such as consent rights over key decisions and director removal. Ensure majority shareholders and directors understand their obligations to avoid conduct that could constitute unfair prejudice. Seek legal advice early if you believe minority shareholder rights are being breached, as court remedies can be costly and time-consuming.
On this page
Minority shareholders have less voting power than majority shareholders, but the law provides them with important protections that cannot be overridden by a company’s articles of association. Understanding these rights is essential for anyone holding a minority stake in a company. This article provides an overview of these rights and explains their significance.
What Are Minority Shareholders?
A company’s shareholders collectively make important decisions for the company through voting on resolutions at shareholder meetings. Each shareholder’s influence in the company is directly linked to the voting rights attached to their shares. Not all shareholders necessarily hold voting rights, as the company may issue a class of shares that does not carry voting rights (for example, Class B shares with no voting rights).
Technically, you are a minority shareholder if you own less than 50% of voting rights in a company. Therefore, any shareholder holding more than 50% of the voting rights has significant power to appoint and remove directors and approve shareholder resolutions that require a majority of the votes.
In practice, shareholders with more than 25% of the shares can block special resolutions. Special resolutions require the approval of shareholders holding 75% or more of the shares to make fundamental changes to the company (for example, updating the company’s articles of association). Consequently, if a shareholder has over 25% of the votes, they can oppose significant proposals.
Where are Minority Shareholder Protections?
Most of the rules that govern a company are outlined in your company’s articles of association and shareholders’ agreement. Companies have broad powers to determine their operations through the votes of their directors and shareholders. However, certain laws limit the ability of your company, its directors, and majority shareholders from infringing on the rights of minority shareholders. Therefore, regardless of what your company’s articles or shareholders’ agreement specify, these rights stay protected.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
How Can Minority Shareholders Protect Their Rights?
Shareholders and directors are legally distinct. Therefore, they have different rights and obligations. In most cases, the interests of shareholders and directors broadly align — they all want to maximise the company’s profit. However, this is not always the case.
Minority shareholders have three primary options to protect their rights, all of which involve seeking court intervention. These are:
- claims of unfairly prejudicial conduct;
- petitions for the winding up of the company; and
- derivative claims.
To illustrate how each method works, we will use the following example and demonstrate its application to each option.
An Example
Say you own 80% of your company’s shares (and hold 80% of all available votes). You are also a director. Likewise, the four other directors receive the remaining 20% of the shares, giving each of them 5%. Using your shareholding powers, you decide to remove all directors. You propose a new resolution to authorise the company to pay you an unreasonable director’s salary. As the shareholder, you approve this.
The minority shareholders are prejudiced since you receive an unreasonable salary. This money could instead be reinvested in the company or paid out as a dividend. They cannot take action at the shareholder level to remove you as a director because you can block any resolution they put forward. Additionally, you also ratified the unlawful resolution.
What Options Do the Minority Shareholders Have to Protect Themselves?
Unfair Prejudice
The law recognises the right of all shareholders not to be unfairly prejudiced by other shareholders. However, if a shareholder feels they have been mistreated, they can petition the court. The court will determine if the conduct is objectively unfair and prejudicial by examining whether it breaches an agreement between shareholders regarding the company’s management.
Notably, shareholders cannot ask the court to consider conduct that might prejudice them in a capacity other than a shareholder. For instance, removing the other shareholders from the board of directors might be unfair. However, that conduct would not necessarily affect their rights as shareholders. Although a shareholder may also serve as a director, particularly for a smaller company, this action may occur in the broader context that is unfairly prejudicial to the individual as a shareholder.
In addition to authorising unreasonable salaries, other conduct that can amount to unfair prejudice includes:
- not issuing dividends;
- directors exercising their powers improperly;
- refusing to provide shareholders with accounts and financial information where the shareholders are entitled to this information; and
- not permitting minority shareholders to participate in management, where the company is formed on the basis that all shareholders will share in the management of the company.
That said, such conduct does not necessarily mean it is unfairly prejudicial. It is a question for a judge to decide. If the court is satisfied that the conduct is unfairly prejudicial, it has the power to rectify the situation. For example, the courts can rectify the situation through orders requiring the conduct to cease or requiring the other shareholders to buy out the aggrieved shareholder.
Winding Up the Company
All shareholders have the right to petition the court to wind up a company, which is equivalent to permanently dissolving a company. The effect is that the Court will sell the company’s assets to pay off any creditors, with the remaining proceeds distributed to the shareholders.
To put it lightly, this is the nuclear option. A court will only grant such a petition where it is just and equitable to do so. In most cases, especially when the company is not in financial distress, the court will deny the motion because other options are available. Therefore, in practice, aggrieved shareholders will ask the court to recognise unfair prejudice before seeking a winding-up order.
Derivative Claims
In the above examples, minority shareholders are taking legal action against the company itself. The general principle—commonly known as the rule in Foss v Harbottle—is that it is for the company to initiate proceedings where a wrong has been done to it. However, in limited circumstances, a minority shareholder or shareholders can bring a claim on behalf of the company through a derivative action. That is, the shareholder applies to the court in the company’s name. To do this, the shareholder must demonstrate that there has been a breach of the company’s rights. Derivative claims are not suitable for asserting personal rights as a shareholder.
In the example, a derivative claim can be feasible on the basis that you are exercising your directors’ duties with malfeasance. This is also known as misappropriating the company’s assets. However, if you just removed all shareholders as directors without cause but exercised your directors’ duties competently, the law would likely not recognise the legitimacy of a derivative claim.
How Do Shareholder Agreements Protect Minority Shareholders?
This article has only examined how shareholders can protect their interests under company law, which seeks to protect them as shareholders (and not in any other capacity). The company’s articles of association cannot overrule these shareholder rights. If there are provisions in the company’s articles, the law will refuse to recognise them.
However, suppose you and the shareholders agree to abide by an additional set of terms and conditions as agreed upon. The law that governs companies and their shareholders will not have the authority to comment on this agreement. Instead, contract law will govern here. Such agreements are called shareholder agreements. They are purely private agreements.
In practice, no shareholder would agree to sign a shareholder agreement that restricts them in a personal capacity to rights they already have as shareholders under company law. Instead, minority shareholders often use shareholder agreements to strengthen their position. For example, you might have a clause that states no director can be removed without the unanimous approval of the board. If this clause is in place in our example, you would breach the shareholder agreement by removing all other directors without the approval of the other shareholders. As a result, the shareholders would be entitled to sue you in your personal capacity under the shareholders’ agreement.
This guide outlines how to resolve commercial disputes.
Key Takeaways
Absent checks against a majority of shareholders, they can act in a way that is unfair to one or more minority shareholders. However, the law grants certain protections to minority shareholders, enabling them to seek help if they believe they are not being treated fairly. These are all causes of action that the aggrieved shareholder must pursue in court, and include:
- claims of unfair and prejudicial conduct;
- a petition seeking an order to wind up a company; and
- derivative claims brought on behalf of the company.
The company’s articles of association cannot overrule the right of shareholders to bring these claims. Additionally, a well-drafted shareholder agreement can provide further protection, but only under the terms of the contract and not through any rights arising from being a shareholder.
If you need help with matters of corporate governance, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
At the most fundamental level, minority shareholders have the right not to be mistreated or treated with prejudice. Minority shareholders can enforce these rights in a court by presenting a petition asking a judge to recognise the conduct. If this is recognised, the court has the power to issue an order against the conduct and award damages. Alternatively, they can order the other shareholders to purchase the aggrieved shareholders’ shares.
The former is brought by the shareholder in the shareholders’ name. In comparison, the latter is that a shareholder brings the latter on behalf of the company.
Yes, shareholders holding more than 25% of shares can block special resolutions, which require 75% approval. This gives minority shareholders meaningful power to oppose fundamental changes like amending the articles of association.
Courts only grant winding-up petitions where it is just and equitable to do so. They rarely grant them when the company is financially stable and other remedies, such as unfair prejudice claims, remain available.
We appreciate your feedback – your submission has been successfully received.
