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If you own shares in a company, you might be wondering what sort of rights you will receive. For instance, does buying a single share in Tesco mean you can cut the queue to pay for your groceries? This article will explain the general rights shareholders have and how they can enforce these rights in the event of a dispute.
Articles of Association
In general, there is a special contract between shareholders and the company.
Your company constitution will set out the rights a company owes its shareholders. Likewise, you ca find your company constitution within the articles of association. Since these articles can vary, shareholders in different companies may have different rights.
Common shareholder rights specified in the articles include the right to:
- vote on substantial issues;
- share in the company’s profits;
- transfer ownership of the shares;
- be consulted or informed before the directors make a particular decision on the company’s behalf.
Other Rights
The law also provides certain rights that a company cannot modify or remove, 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;
- receive yearly updates;
- attend and vote in shareholder meetings; and
- petition the court in certain circumstances to enforce your rights.
Different Classes of Shareholders
Importantly, your rights as a shareholder will depend on which class of shares you own.
Different classes of shares will entitle the shareholder to different rights. For instance, ordinary shares generally entitle the shareholder to:
- cast votes in shareholder meetings;
- have the weight of each vote be proportionate to the number of shares they hold;
- receive dividend payments; and
- receive a return of capital upon the wind-up of the company.
A company may also issue a separate class of shares, such as preference shares. These may entitle preference shareholders to a dividend payment before the ordinary shareholders.
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Enforcing Your Rights
If a company breaches your shareholder rights, there are three different ways you can enforce your rights. All three require you to petition the court. If the judge finds sufficient evidence demonstrating a breach of your rights, the court may order in your favour.
Unfair Prejudice
Suppose every shareholder holding the same class of shares receives a payment except for you. In this case, the company has treated you with unfair prejudice. Again, 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. A common tactic is deliberately failing to give them sufficient notice to vote in shareholder meetings.
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.
Winding Up a Company
In some cases, you can petition the court to order for the winding up of the company. 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.
Key Takeaways
As a shareholder, you have a special contract with the company. While it may not entitle you to jump the queue, you have entitlements to share in a company’s profits, as well as vote in meetings. The company’s articles of association will detail the full extent of your rights. If your rights are breached, you can enforce them in a court by bringing a claim in your own name or on behalf of the company.
If you need help navigating your shareholder rights and obligations, 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
The most common rights shareholders have are the rights to be paid dividends, vote in shareholder meetings, and the right to the return of capital upon the dissolution of the company. There are other rights as well, such as the right to inspect certain documents and receive copies of the company’s annual accounts and reports.
Preemptive rights entitle shareholders of a company to subscribe to new shares or purchase existing shares in the company before any third party.
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