Knowledge Base

A shareholder is an individual, body corporate, or other property-owning entity that owns at least one share in a company. Shareholders, also known as members, are distinct from the directors who manage the day-to-day affairs of the company. Shareholders typically seek to share in the income profits of the company and achieve capital gain through an appreciation in the value of their shareholding. They participate in general meetings to resolve matters of specific importance regarding the constitution, business, or corporate activity of the company, in accordance with company law and the company’s constitution.

Shareholders or members of a company do not have any authority to intervene in the day-to-day management of the company or to bind the company. The most important function of shareholders is to elect directors, as the management of the company is vested in the board of directors. Shareholders wishing to exercise influence at the board level must have sufficient representation on the board, control over the directors, or sufficient voting strength to threaten to remove one or more directors under the Companies Act 2006

A minority shareholder is typically defined as a member who holds less than 50% of the shares in a company that have voting rights attached. This means that they do not have sufficient shares to control or block ordinary or special resolutions, leaving them at risk of having their views disregarded by the majority shareholders.

Minority shareholders often face challenges in influencing the management of the company. To protect their interests, they may resort to various legal remedies such as bringing an unfair prejudice claim, pursuing a derivative action, or seeking a winding-up petition.

Shareholders of a company in England and Wales have several key roles. Primarily, they play an important constitutional role by making significant decisions regarding the company’s operations and changes. For instance, shareholders must approve changes to the company’s name, articles of association, or share capital. These decisions can be made through resolutions passed at general meetings, annual general meetings, or by written resolution.

Shareholders do not have the authority to intervene in the day-to-day management of the company, which is the responsibility of the directors. However, they hold the crucial power to elect directors, as the management of the company is vested in the board of directors. Shareholders can influence the board by having sufficient representation or control over the directors, or by having enough voting strength to threaten the removal of directors.

In summary, while shareholders do not manage the company’s daily operations, they hold significant powers in shaping the company’s governance and strategic direction through their voting rights and the election of directors.

Shareholders in England and Wales have a variety of rights, which can be broadly categorised into rights related to meetings, voting, financial entitlements, and legal actions.

In the absence of a shareholders agreement, shareholders’ rights are set out in the articles of the company and have certain basic protections under company law they can invoke which include:

• the right to be properly notified of any meeting of the company;
• the right to attend and vote at any meeting of the company where they fall into the requisite class of shareholding;
• the right to a dividend if one is declared by the company and their shares entitle them to one;
• the ability, if they are shareholders entitled to vote at a general meeting of the company, to request the directors or the court (where it is impracticable to call or conduct a meeting as prescribed by) to order a meeting to be held;
• the ability of any shareholder with 10 per cent of the voting shares to:
  •  (i)     block a takeover offer;
  •  (ii)     apply to the Department for Business, Energy & Industrial Strategy (BEIS) for an investigation;
•  the ability of a shareholder owning more than 25 per cent of the voting shares to block any special resolution including those to change the articles or increase share capital (this is known as having negative control);
• the ability of a shareholder owning more than 50 per cent of the voting shares to ensure the passing of all ordinary resolutions such as those under authorising the removal of directors and therefore to exercise significant control;
• the ability of a shareholder owning at least 75 per cent of the voting shares to pass special resolutions and therefore to exercise control;
• where a company’s share capital is divided into different classes of shares, the ability of shareholders owning shares of a particular class to block variations of those rights with a simple majority, and the ability of shareholders owning not less than 15 per cent in aggregate of the issued shares of a particular class to apply to the court to have any variation cancelled;
• the ability of all shareholders, irrespective of the size of their shareholding, to seek an order of the court on the grounds that the company’s affairs ‘are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members including at least himself’9;
• the ability of a shareholder to petition the court for an order to wind up the company on the just and equitable ground; and
• the ability of all shareholders to bring derivative claims under Companies Act 2006.

What can a minority shareholder do if they feel their interests as a shareholder are being unfairly prejudiced?

A minority shareholder who feels their interests are being unfairly prejudiced can seek relief under section 994 of the Companies Act 2006. This provision allows a minority shareholder to petition the court on the grounds that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of some or all of its members, or that an actual or proposed act or omission of the company is or would be so prejudicial.

The court has wide discretion in granting relief, with the most common remedy being an order for the majority shareholder to buy out the minority shareholder’s shares at a fair value. This remedy aims to provide a fair exit for the minority shareholder from the company.

In a section 994 petition under the Companies Act 2006, the valuation of a company or shareholding for buyout purposes is determined by the court, which has wide discretion to ensure the valuation is fair and equitable. The court typically values the shares at the date of the order for purchase, but it may choose an earlier date if it deems it appropriate to avoid any diminution in value caused by the unfair conduct complained of.

The court may use different valuation methods depending on the circumstances. The usual approach is to value the company as a going concern, based on dividends, earnings, and income. However, in certain situations, an asset-based valuation or a combination of both methods may be more appropriate.

A minority discount in relation to company valuations refers to the reduction in the value of a minority shareholding compared to its pro-rata share of the total company value. This discount is applied because minority shareholders typically lack control and influence over the company’s decisions, which can affect the attractiveness and marketability of their shares. The size of the discount can vary significantly, depending on factors such as the size of the minority holding and the specific circumstances of the company.

A quasi-partnership is a term used to describe a company that operates similarly to a partnership, even though it is legally incorporated as a company. This concept typically applies to private limited liability companies where the shareholders have a close personal relationship and mutual confidence, often resembling the dynamics of a traditional partnership. The term is not a term of art but is frequently used in judicial decisions, particularly in the context of minority shareholder protections under the Companies Act 2006.

In a quasi-partnership, the shareholders are often involved in the management of the company and there may be restrictions on the transfer of shares. The relationship between the shareholders is characterised by trust and confidence, and equitable considerations play a significant role. This means that the shareholders’ relationships and conduct are governed by principles of fairness and good faith, which are not typically associated with standard shareholder rights.

The concept of a quasi-partnership can arise in various scenarios, such as when a business previously operated as a partnership is incorporated into a company, or when a company is formed by individuals who intend to work closely together. It is also possible for a quasi-partnership relationship to develop after the formation of the company.