Quick Reads: Minority Shareholder Protections

There’s three key percentages when it comes to share ownership and voting rights: 25%, 50% and 75%. More specifically, it is over 25% and over 50% (by the smallest fraction possible) and 75% on the nose or over.

Their importance stems from shareholder voting percentages i.e. the percentage of shares held by shareholders eligible to vote, voting in favour. A special resolution requires at least 75% - this can be changing the company’s articles, changing its name or disapplying pre-emption rights on share allotments. An ordinary resolution requires over 50%– this covers most shareholder resolutions, for example share allotments, share buybacks and appointing and removing a director. Over 25% permits a holder (or holders in unison) blocking a special resolution; likewise over 50% allows the shareholder(s) to block an ordinary resolution.

This why percentages matter: control. A minority shareholder is anything below 50% with the control dwindling further as one falls below 25%.

What can be done about this to maintain control? Aside from the obvious (and unhelpful) answer “don’t be a minority shareholder” there are solutions to the potential problems – though typically the smaller the stake, the smaller the bargaining power.

A starting point should always be to maintain the percentage you hold. It may come as surprise to minority shareholders that they can (and often do) suffer share dilution – at times this may be justified for example a large investment into the company in exchange for equity increases the company’s value/prospects – a smaller slice of the pie but still worth as much or indeed more. There are safeguards at Company Law to prevent share dilution – this is known as pre-emption rights whereby any future share allotments must first be offered to the existing shareholders pro rata. It is fair but not watertight – a minority shareholder still needs to subscribe (read: pay) for the new shares and may not have the funds and, more bluntly, the basic right can be disapplied in the Articles of Association or by way of pre-emption disapplication – both of these require a special resolution, therefore its back to percentages (this time over 25%).

Another aspect to consider is directorship. If you’re below 50%, then you’re exposed to removal by way of ordinary resolution. If part of your shareholding is that you’re a director then you’ll want a specific agreement (either a class right in the Articles or a private right in a shareholders’ agreement, or both) permitting you to maintain your position as a director should you wish – there’s various ways to do this. Perhaps directorship is not of interest, but what about enhanced information rights so you can understand what is happening in the company or indeed a right to be an observer at board meetings – at law, as a minority shareholder, you do not have these and can be pretty much left in the dark.

So, what can be done to protect a minority shareholder? Get the protections that matter within the Articles of Association and/or a Shareholders’ Agreement. Percentages can be disregarded by way of specific share class rights or private contractual rights between shareholders: with certain exceptions, the basic position at law is just a starting point and a more tailored approach may be required.

For further information, please contact Phil: philipmiles@bexleybeaumont.com  |  07388 344576