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When you buy shares in a company, you might consider yourself a shareholder. The term ‘shareholder’ is synonymous with ‘members of a company’. Notably, however, the law does not define shareholders, preferring to use the term ‘members’ instead. There are instances where it may be important to appreciate the legal nuance behind the law’s use of ‘member’. This article will explain these instances.
Overview
Shareholders are essential to a company. However, surprisingly, the term does not have a legal definition. Instead, company law – including different Acts of Parliament, secondary pieces of legislation and court cases – tend to use the term ‘members’ when referring to shareholders. There are a few reasons for doing so. The following section explores these reasons.
‘Members’ is More Inclusive
Generally, the term ‘members’ is more inclusive. One reason is that members can describe owners of companies and other incorporated entities that do not have any share capital.
For example, companies limited by guarantee do not have any share capital. Instead, those that invest in a company limited by shares have their liability limited by a pre-agreed amount. So, it would not make sense to refer to them as shareholders, given there are no shares to own.
Similarly, limited liability partnerships are owned by partners. However, because they share some similarities with companies, like being incorporated entities, the law calls an LLP’s partners ‘members.’
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Concept of Membership is More Precise
People generally think that you become a shareholder by owning a share in a company. That is, if you hold a share, you have some degree of ownership in the company. Likewise, you also have certain rights as a result. While this is intuitive, it is not entirely accurate from a legal perspective.
Importantly, the law says you have rights attached to any shares you hold if either:
- you are a subscriber to a company’s memorandum of incorporation; or
- you have agreed to become a member and are entered in its register of members.
Regarding subscription, the law uses the term ‘subscriber’ to refer to any person that was a contributing member at the time of the company’s incorporation. So, provided you still own the shares you received upon subscription, you would still be a member. Further, you will have the rights associates with being a shareholder.
Likewise, you may have the legal right to a company’s shares. A common example is if shares were lawfully transferred to you after purchasing them from another person. In this instance, the seller will usually entitle your name to be entered in the company’s register.
If this sounds like a bit of legal sophistry, these distinctions are meaningless in practice in many cases. If you buy shares and they are properly transferred to you, the company’s directors will ultimately enter your name in the members’ registry.
However, there are certain cases where this distinction is relevant.
Options and Warrants
Options and warrants are special financial instruments. They give the holder the option or warrant a right to purchase equity in the company at a:
- specified price; or
- after a specific date or event.
For instance, suppose you are the new director of a company. Likewise, you might receive some option shares. Options shares entitle you to purchase additional shares at a later date at a value below the market price. The advantage is that you would not be obligated to purchase these shares, such as if there was not a substantial difference between the market value and option value.
However, until you actually convert the options or warrant into the shares, those options will not entitle you to that portion of share capital in the company. Therefore, if you do not have any other shares in the company, you would not be a member of the company despite holding shares.
So, you could not enforce your rights against the company as a member.
Restrictions on Transfers of Shares
While this is not a clear cut area of law, in general, it is possible for a company to restrict the situations in which its members transfer their shares.
This is a common feature in the articles of association for private companies. The main reason is that the founding company members may not want new members to join without their permission.
For example, suppose you and some business partners started a new company. Likewise, one of the terms in your company’s articles of association was an absolute prohibition on the transfer of shares to any person not a subscriber to your company’s memorandum of association. So, what would happen if you sold your shares to another person, like your sister?
The answer may be that, though your sister has the legal ownership of the shares themselves and that she may agree to become a member, the company itself would not be required to register your sister as a member in the company’s member registry. This is because she is not eligible under the company’s articles of association.
In other words, your sister would be a shareholder in the practical sense of the word, but would have no right as a member in the legal sense.
Note that a public company cannot restrict the transfer of company shares.
Key Takeaways
Most people in the business world use the term ‘shareholder’ to refer to those individuals with legal rights in a company. However, the legal term for a shareholder is a ‘member.’ A member also refers to individuals with similar rights of legal rights in incorporated entities like companies limited by guarantee and limited liability partnerships. For the vast majority of situations, the terms ‘member’ and ‘shareholder’ will have the same meaning in the practical and legal sense. However, there are certain exceptions where, despite holding shares in a literal sense, you may not be entitled to the legal rights of ownership in the company because you would not be a member.
If you need help asserting your rights as a shareholder, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
For most practical purposes, when the law refers to a company member, it means the same thing as a shareholder. What is the difference between a member and a shareholder?For most practical purposes, when the law refers to a company member, it means the same thing as a shareholder.
Technically speaking, holding shares in a company does not grant you membership rights in the company. Instead, you must be registered as a member in the company’s membership registry to become one. Practically, if you own shares in a company, the directors will register you as a member unless they have some exceptional reason not to do so.
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