Obligations and Rights of Shareholders

If you are a shareholder of a company registered in the UK, you may wonder about your obligations to other shareholders and the company itself. For instance, do you have to pay the company’s debts if it cannot? Or must you act with other shareholders in mind? Alternatively, you may also wonder what rights you have as a shareholder and how you can enforce these rights in the event of a dispute. This article will provide an overview of the various obligations you owe and the rights you enjoy as a shareholder.

Obligations vs Rights

Obligations and rights refer to two sides of the same coin. If Rahul owes you an obligation, you have a right against Rahul. If Rahul has a right against you, you owe Rahul an obligation. 

An obligation refers to something that you must do for some reason. For instance, if you enter into a lawful contract, you have a contractual obligation to fulfil your end of the contract. Otherwise, you can be held liable for your failure to do so. 

Ultimately, this means a court can order you with the force of law to refrain from or perform some action in the contract. Likewise, they can order you to pay some money as a consequence of you not fulfilling your obligation.  

On the other hand, rights refer to your ability to require someone else to fulfil their own obligation in your favour or interest. If they do not, you can ultimately petition a court to order them to do so or to pay you a sum of money in place of their failure to do so. 

Shareholder Obligations

Limited Liability 

Under English and Welsh company law, you will tend to find that the law gives shareholders far more rights than it imposes upon them certain obligations. 

In fact, the concept of limited liability means that despite owning a company, shareholders have limited responsibility for their company’s obligations. 

Usually, when shareholders pay for company shares, their liability is limited to that value. So, when the company is growing and paying its debts as they come due, this is not a concern. 

However, if the company can no longer meet its obligations, its creditors may initiate insolvency proceedings to recover their money. Usually, when this happens, the company does not have enough money to pay back all the creditors in full. The concept of limited liability means that they cannot come after the shareholders for any remaining amount (provided there is no fraud or unlawful activity). 

Obligations Under the Articles of Association

The company’s articles of association is the primary source of the rules that govern the company and the relationship between it and the shareholders. It creates a particular contract between:

• each shareholder and the company; and 
• each shareholder and the other shareholders. 

As this relates to your obligations, the articles will set out certain responsibilities that you must abide by as a shareholder. If you do not, another shareholder may have a claim against you or the company. Common examples include obligations relating to voting and dividend rights. 

However, suppose there are terms in the articles that try and create a legal obligation between shareholders and other people not acting in the capacity of a shareholder. In that case, they will not have an effect. This is true even where the person benefitting from the term is a shareholder. 

To give you an example, say you are one shareholder of a company among several others. Likewise, suppose there is a term in your company’s articles that states another shareholder has a right to be a director and this term is not honoured. In that case, this aggrieved shareholder will not have any right to enforce against you or the company as a shareholder. This is because this term does not concern the shareholder in their capacity as a shareholder (merely a director). 

Other Obligations 

Insofar as you are a shareholder, the law places few other obligations upon you. However, if you are also a director of the company, you will owe many duties to the company. However, this is distinct from your position as a shareholder from a legal perspective. 

Similarly, if you enter into any contractual agreements with other shareholders (commonly called “shareholder agreements”), you will in effect owe the other shareholders certain duties and responsibilities depending on the terms of the contract. But these obligations are not owed in your capacity as a shareholder. 

In other words, they cannot sue the company for any breach of the agreement. Nor can they sue you as shareholders. 

Shareholder Rights 

Articles of Association

Common shareholder rights specified in the articles include the:

• process by which shareholders can appoint directors; 
• number of voting rights necessary for shareholders to call meetings; and 
• right to be consulted or informed before the directors make a particular decision on the company’s behalf. 

Therefore, to fully understand the nature of your rights as a shareholder, you must inspect your company’s articles of association. Fortunately, another one of your rights is the right to inspect certain company documents, like its articles of association and accounts. 

Other Rights 

The law also provides certain rights that cannot be modified or done away with, even if the articles attempt to do so. One common example is the right of shareholders to remove a director. 

Other examples include the right to:

• receive a share certificate within two months of allotment; 

• inspect certain company documents and records, as well as receive yearly updates; 
• attend shareholder meetings like the annual general meeting; 
• vote in the shareholder meetings; and 
• petition the court in certain circumstances.  

Different Classes of Shareholders

It is common for companies to have different classes of shares. Each class may have different rights compared to other classes of shares. Common distinctions include different:

• rights to dividend payments; 
• voting rights; and 
• entitlements to a return of capital upon the wind-up of a company. 

Enforcing Your Rights 

If your rights as a shareholder have been breached, there are three different ways shareholders can enforce their rights. All three require the shareholder to petition the court. If there is sufficient evidence, the court may order in your favour. 

Unfair Prejudice 

Say that you own the same class of shares as every other shareholder. Every shareholder but you receives a dividend payment. This is an example of when a company has conducted its affairs in such a way that is “unfairly prejudicial” to a particular shareholder. Remember, a company must treat shareholders of the same class equally.

Another common example is where directors control the company in such a way as to “freeze out” a minority shareholder. For example, they may deliberately not inform them of meetings as a way to intentionally deprive them of their rights. 

If you can prove to the court that the conduct is “unfairly prejudicial” towards you as a shareholder, the court has wide powers to make an order. The most common order is for the other shareholders to purchase your shares at a fair market price. 

Winding Up a Company 

In some cases, you can petition the court to order your company wound up. This means that all the company’s assets will be sold off, and each shareholder will have their portion of capital returned according to their shareholding. 

Two common circumstances when this order is successfully made include when:

• management cannot agree as to how to run the company; or
• it can no longer carry on doing business. 

A Derivative Claim

A derivative claim is a special claim where a shareholder (or group of shareholders) brings a claim on behalf of the company (rather than in their own name) because there has been a wrong committed against the company itself. 

The most common reason where shareholders might bring a derivative claim is when directors behave fraudulently. 

Key Takeaways

By and large, shareholders have more rights than they do obligations. Their obligations are quite narrow in scope. Indeed, the most common obligation is their limited liability for their company’s debts. On the other hand, shareholders’ rights are more expansive. A company’s articles of association will largely set out these rights. In addition, the law grants shareholders special mechanisms for enforcing their rights against the company or other shareholders. 

If you need help navigating your shareholder rights and obligations, or are uncertain if you should incorporate your business, 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.

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