Learning Outcomes
After studying this article, you will be able to identify and explain the main legal rights, duties, and powers of shareholders in companies under English law. You will understand how shareholders influence company decisions, the procedures for exercising their powers, and the remedies available to protect minority interests. You will also be able to apply these principles to SQE1-style problem questions.
SQE1 Syllabus
For SQE1, you are required to understand the legal framework governing shareholders in companies, including their rights, duties, and powers. Focus your revision on:
- The statutory and constitutional rights of shareholders in private and public companies
- The procedures for exercising voting rights and passing resolutions
- The ability to call general meetings and propose resolutions
- The appointment and removal of directors by shareholders
- The remedies available to shareholders, including derivative actions and unfair prejudice petitions
- The duties and responsibilities of shareholders, including compliance with the company’s constitution
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What percentage of voting rights is required for shareholders to call a general meeting?
- Which statutory remedy allows a shareholder to petition the court if the company’s affairs are conducted in a manner unfairly prejudicial to them?
- Can shareholders remove a director by written resolution?
- What is the minimum majority required to pass a special resolution to amend the articles of association?
- Name two key duties shareholders owe in relation to the company’s constitution.
Introduction
Shareholders are the owners of a company and play a central role in corporate governance. Their rights, duties, and powers are defined by the Companies Act 2006, the company’s articles of association, and, in some cases, shareholders’ agreements. Understanding these legal rules is essential for advising clients and answering SQE1 questions on company law.
Key Term: shareholder
A person who owns shares in a company and is a member of that company.
Shareholder Rights
Shareholders have a range of rights that allow them to influence company decisions and protect their interests. These rights are found in statute, the articles, and sometimes in shareholders’ agreements.
Voting Rights and Resolutions
Shareholders exercise control primarily through voting at general meetings or by written resolution. There are two main types of resolution:
Key Term: ordinary resolution
A resolution passed by a simple majority (more than 50%) of votes cast by shareholders.Key Term: special resolution
A resolution passed by not less than 75% of votes cast by shareholders.
Voting is usually on a show of hands (one vote per shareholder), but a poll vote (one vote per share) can be demanded.
Right to Call General Meetings
Shareholders holding at least 5% of the paid-up voting share capital can require the directors to call a general meeting. If the directors fail to do so, the shareholders can call the meeting themselves.
Key Term: general meeting
A formal meeting of shareholders to make decisions on company matters.
Right to Information
Shareholders are entitled to receive notice of meetings, annual accounts, and reports. They can inspect the register of members, directors’ service contracts, and the company’s articles.
Right to Dividends
Shareholders may receive dividends if and when declared by the company, but there is no automatic right to a dividend. Dividends can only be paid from distributable profits.
Key Term: dividend
A payment made by a company to its shareholders out of profits available for distribution.
Right to Transfer Shares
Subject to any restrictions in the articles, shareholders can transfer their shares to others. The directors may have discretion to refuse registration of a transfer.
Right to Remedies
Shareholders have statutory remedies if their rights are infringed or if they suffer unfair treatment.
- Derivative claims: Allow shareholders to bring proceedings on behalf of the company against directors for wrongdoing.
- Unfair prejudice petitions: Allow shareholders to seek relief if the company’s affairs are conducted in a manner unfairly prejudicial to their interests.
- Just and equitable winding up: In rare cases, shareholders can petition for the company to be wound up.
Shareholder Powers
Shareholders have significant powers to influence company management and structure.
Appointment and Removal of Directors
Shareholders can appoint directors by ordinary resolution (subject to the articles). They can remove a director by ordinary resolution at a general meeting, even if the director’s contract or the articles say otherwise. Special notice (28 days) is required.
Amending the Articles
Shareholders can amend the articles of association by special resolution. Some provisions can be entrenched, requiring a higher threshold or additional steps.
Approving Certain Transactions
Shareholder approval is required for:
- Substantial property transactions with directors or connected persons
- Loans, quasi-loans, and credit transactions with directors
- Directors’ long-term service contracts (over two years)
- Payments for loss of office
The required approval is usually by ordinary resolution, with supporting documentation provided in advance.
Calling Meetings and Proposing Resolutions
Shareholders can require the directors to call a general meeting or circulate a written resolution. They can also demand a poll vote at meetings.
Ratification of Directors’ Actions
Shareholders can ratify certain acts or omissions of directors by ordinary resolution, except where the act is unlawful or cannot be ratified.
Shareholder Duties
Although shareholders are not generally fiduciaries, they have important duties.
Duty to Comply with the Constitution
Shareholders must exercise their rights in accordance with the company’s articles and the Companies Act 2006. They must respect the division of powers between the board and the shareholders.
Key Term: articles of association
The company’s main constitutional document, setting out rules for internal management and shareholder rights.
Duty of Good Faith and Proper Purpose
Shareholders must exercise their powers for proper purposes and in good faith, especially when voting to amend the articles or remove directors. Courts may intervene if majority shareholders act oppressively or for an improper purpose.
Disclosure Duties (Public Companies)
In public companies, shareholders with significant holdings (usually 3% or more) must disclose their interests under the Disclosure Guidance and Transparency Rules.
Remedies for Minority Shareholders
Minority shareholders are protected by statutory remedies if they suffer unfair treatment or are excluded from management.
Derivative Claims
A shareholder may bring a derivative claim on behalf of the company against directors for negligence, default, breach of duty, or breach of trust. Court permission is required.
Unfair Prejudice Petitions
A shareholder can petition the court if the company’s affairs are conducted in a manner unfairly prejudicial to their interests (s. 994 CA 2006). The court can order the purchase of the petitioner’s shares or regulate the company’s affairs.
Just and Equitable Winding Up
In exceptional cases, a shareholder can petition for the company to be wound up on just and equitable grounds (s. 122(1)(g) Insolvency Act 1986), such as deadlock or loss of trust in a quasi-partnership company.
Worked Example 1.1
A shareholder with 10% of the voting shares is repeatedly denied access to company accounts and is excluded from meetings. What remedies are available?
Answer: The shareholder can require the directors to call a general meeting, demand access to statutory information, and may petition the court for unfair prejudice if exclusion is serious and ongoing.
Worked Example 1.2
A company’s majority shareholders pass a special resolution to amend the articles, removing a minority shareholder’s right to appoint a director. The minority claims unfair prejudice. Is this likely to succeed?
Answer: If the amendment is bona fide for the benefit of the company as a whole, the court will not intervene. However, if the amendment is oppressive or for an improper purpose, the court may grant relief.
Revision Tip
When answering SQE1 questions, always identify whether the shareholder’s right is statutory, constitutional, or contractual. Consider the correct procedure and threshold for exercising each right.
Key Point Checklist
This article has covered the following key knowledge points:
- Shareholders exercise influence through voting, meetings, and resolutions
- Ordinary resolutions require a simple majority; special resolutions require 75%
- Shareholders holding 5% can require a general meeting to be called
- Shareholders can appoint and remove directors by ordinary resolution
- Remedies for minority shareholders include derivative claims and unfair prejudice petitions
- Shareholders must comply with the company’s constitution and act in good faith
- Approval is required for certain transactions with directors or connected persons
Key Terms and Concepts
- shareholder
- ordinary resolution
- special resolution
- general meeting
- dividend
- articles of association
