Learning Outcomes
This article outlines the statutory and constitutional sources of shareholder rights, the thresholds and procedures for passing ordinary and special resolutions, and the distinction between decisions taken at general meetings and by written resolution, including poll votes, short notice and proxy voting. It covers shareholders’ powers to call meetings, propose and circulate resolutions, appoint and remove directors, amend the articles, ratify directors’ actions and approve transactions with directors or connected persons. It explains rights to information, dividends and transfer of shares, and the practical significance of contractual protections in shareholders’ agreements. It examines shareholder duties, the division of powers between the board and members, and the proper purpose and good faith limits on majority action. It analyzes statutory remedies available to minority shareholders—derivative actions, unfair prejudice petitions and just and equitable winding up—and highlights the procedural hurdles, permission tests and strategic considerations relevant to SQE1 problem questions and typical exam fact patterns.
SQE1 Syllabus
For SQE1, you are required to understand the rights, duties, and powers of shareholders within corporate governance and compliance, with a focus on the following syllabus points:
- 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/circulate resolutions
- The appointment and removal of directors by shareholders
- The approval of directors’ transactions (service contracts, loans, SPTs, loss of office)
- 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.
Note that “member” and “shareholder” are often used interchangeably in companies with a share capital, but they are not the same concept: a person becomes a member only when entered on the register of members even if they have purchased shares.
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 at meetings is usually on a show of hands (one vote per shareholder present in person or by proxy). However, a poll vote (one vote per share) can be demanded under the articles or statute, and, if demanded, the poll result overrides any earlier show of hands. In private companies adopting the Model Articles, a poll can be demanded by the chair, by the directors, by two or more shareholders entitled to vote, or by shareholders holding not less than 10% of the voting rights. Shareholders are entitled to appoint proxies (s.324 CA 2006), and proxies may demand a poll if the articles permit.
Key Term: written resolution
A resolution of a private company passed in writing, without a meeting; it is passed when the requisite majority of eligible members signify agreement within the 28-day lapse period.
For private companies, most member decisions can be taken by written resolution (s.288 CA 2006). The resolution must be circulated to all eligible members (s.291) and includes instructions on how to signify agreement and the lapse date (28 days by default: s.297). The voting threshold mirrors meetings: over 50% for ordinary, 75% or more for special resolutions. Written resolutions cannot be used to remove a director or an auditor.
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 (s.303 CA 2006). The directors must call the meeting within 21 days of the request so that it is held within 28 days of the notice (s.304). If they fail to do so, the requesting shareholders may themselves call the meeting within 3 months (s.305) and recover reasonable expenses from the company.
Meetings can be held on short notice if a majority in number of shareholders holding at least 90% of the voting rights agree (95% for public companies) (s.307(4)–(6) CA 2006).
Key Term: general meeting
A formal meeting of shareholders to make decisions on company matters.
At general meetings under the Model Articles, the quorum is usually two qualifying persons present (which includes proxies/corporate representatives), unless the company has a single member.
Right to Information
Shareholders are entitled to receive notice of meetings and the text of proposed resolutions. They have statutory rights to inspect:
- The register of members and obtain a copy (s.116–120 CA 2006)
- The register of directors and directors’ residential addresses (s.162, s.165)
- The company’s articles and certain “constitutional documents”
- Directors’ service contracts or a memorandum of their terms (s.228–229)
- Annual accounts and reports (s.423–430)
Members meeting threshold requirements may also require the company to circulate to members a statement of up to 1,000 words relating to a proposed resolution or other business of a meeting (s.314 CA 2006). The company may require security for costs if reasonable.
Right to Dividends
Shareholders may receive dividends if and when declared by the company, but there is no automatic right to a dividend. Final dividends are typically recommended by the board and declared by ordinary resolution; interim dividends may be paid by the board alone if the articles permit (Model Articles). Dividends can only be paid out of distributable profits (s.830 CA 2006). An unlawful distribution may be recoverable from members who knew or had reasonable grounds for believing it was unlawful at the time of payment.
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 Model Articles give directors a discretion to refuse to register a transfer of fully paid shares in certain circumstances (MA 26). Private companies often use the articles or a shareholders’ agreement to impose pre-emption rights on transfers, ensuring that existing members have a right of first refusal if a member wishes to sell.
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.
Key Term: derivative claim
A claim brought by a member on behalf of the company in respect of a director’s negligence, default, breach of duty or breach of trust (ss.260–264 CA 2006).Key Term: unfair prejudice
A remedy under s.994 CA 2006 where a member alleges that the company’s affairs are conducted in a manner unfairly prejudicial to the interests of members (or a class of them).
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 under s.168 CA 2006, even if the director’s contract or the articles say otherwise. Special notice (at least 28 clear days) of the intention to move the resolution must be given to the company (s.312), and the director has statutory rights to make written representations and to be heard at the meeting (s.169). Removal cannot be effected by written resolution (s.288(2)(a)).
In practice, if the board does not cooperate in putting the resolution on the agenda, shareholders can compel a meeting via s.303–s.305 CA 2006. The company should also consider any employment law implications (e.g. wrongful or unfair dismissal for executive directors).
Amending the Articles
Shareholders can amend the articles of association by special resolution (s.21 CA 2006). Any alteration must be bona fide for the benefit of the company as a whole (Allen v Gold Reefs) and may be reviewed where it is oppressive or for an improper purpose. Statute imposes limits (e.g. s.25: a member is not bound to take more shares than held at the date of the alteration without written consent). Articles may include entrenched provisions requiring additional conditions to amend (s.22), but entrenchment cannot prevent amendment with unanimous consent or a court order.
Approving Certain Transactions
Shareholder approval is required for specific transactions involving directors or connected persons, typically by ordinary resolution (with information circulated in advance):
- Substantial property transactions (s.190–196 CA 2006): company acquires from, or disposes to, a director (or connected person) a non-cash asset of “substantial” value. A non-cash asset over £100,000 is substantial; between £5,000 and £100,000 it is substantial if it exceeds 10% of the company’s net asset value (s.191). Exceptions apply for intra-group transactions and transactions with members in that capacity (s.192). Without approval, the transaction is voidable at the instance of the company and the director/connected person may be liable to account (s.195).
- Loans, quasi-loans, and credit transactions (s.197–214 CA 2006): loans to directors of the company or holding company (and certain associated transactions) generally require member approval, subject to exceptions for small amounts and expenditure for company purposes or defending proceedings.
- Directors’ long-term service contracts (s.188): where the guaranteed term is or may be longer than two years, approval is required; otherwise the term is treated as terminable on reasonable notice.
- Payments for loss of office (ss.215–222): payments to a director for loss of office or in connection with transfer of undertaking or shares generally require approval, with specified exceptions (e.g. damages for breach of contract).
Supporting documentation (e.g. a memorandum of the terms) must be made available for inspection before and at the meeting, or circulated with a written resolution where permitted.
Calling Meetings and Proposing Resolutions
Beyond the right to require directors to call a general meeting (s.303), shareholders may:
- Consent to short notice for a general meeting (s.307(4)–(6))
- Demand a poll vote (under s.321 and/or the articles)
- Circulate members’ statements ahead of meetings (s.314)
For private companies, most decisions can instead be taken by written resolution, which is often quicker and cheaper. The written resolution lapses after 28 days if insufficient support is obtained (s.297).
Ratification of Directors’ Actions
Shareholders can ratify certain acts or omissions of directors by ordinary resolution (s.239 CA 2006), except where the act is unlawful or incapable of ratification at law. The votes of the director in breach (and connected members) are disregarded when counting the votes in favour of ratification.
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. Section 33 CA 2006 makes the constitution a contract between the company and its members, and among members themselves, in respect of membership rights. Shareholders must also respect the division of powers between the board and the members: day-to-day management is usually delegated to the directors (Model Article 3), and members cannot override management by ordinary resolution. If the articles permit, members may direct the directors by special resolution (Model Article 4).
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
Courts may intervene if majority shareholders exercise powers oppressively, for an improper purpose, or not bona fide for the benefit of the company as a whole—notably when altering articles or exercising voting power to expropriate rights. The “bona fide for the benefit of the company as a whole” test contains a subjective element (honest belief) with an objective limit (no reasonable person could regard it as beneficial). Improper use of majority voting can give rise to an unfair prejudice petition.
Disclosure Duties (Public Companies)
In public companies whose shares are admitted to trading, significant shareholders must disclose holdings under the Disclosure Guidance and Transparency Rules (DTR 5) when thresholds (e.g. 3%, 4%, 5% and subsequent) are crossed. Separate rules apply to listed issuers under the Listing Rules and the UK Market Abuse Regulation.
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 (s.260 CA 2006). The court’s permission is required and is considered in two stages:
- A prima facie case must be shown on the papers; if not, the claim is dismissed (s.261).
- If the claim proceeds to a permission hearing, the court considers mandatory refusal grounds (e.g. where the act has been ratified, or a director acting under s.172 would not continue the claim) and discretionary factors (s.263), including good faith, the importance of the claim to the company, and whether an alternative remedy is more appropriate (such as an unfair prejudice petition).
Remedies (if the claim succeeds) belong to the company and may include damages, an account of profits, or equitable relief.
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 test is broad and flexible: typical grounds include exclusion from management in a quasi-partnership company, diversion of business or assets, excessive remuneration, or inequitable breaches of the articles or a shareholders’ agreement. The most common order is a buy-out of the petitioner’s shares at a price the court considers fair (often with guidance on valuation, discount, and date). A timely, reasonable offer to buy the petitioner’s shares may defeat a petition where it provides the relief they would likely obtain at trial.
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 mutual trust in a quasi-partnership company. The remedy is drastic; the court may decline to wind up where an alternative remedy (e.g. a buy-out under s.994) is available and appropriate.
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.
Worked Example 1.3
The board refuses to place on the agenda a member’s proposal to remove a director. Shareholders holding 6% of the voting rights want to proceed swiftly. What can they do and can this be done by written resolution?
Answer:
Members holding at least 5% may require the directors to call a general meeting (s.303). If the board does not comply in time, those members can call it themselves (s.305) and recover reasonable costs. Removal of a director must be by ordinary resolution at a meeting with special notice (s.168, s.312) and cannot be done by written resolution (s.288(2)(a)).
Worked Example 1.4
The company proposes to buy a machine worth £60,000 from the CEO’s spouse. The company’s net asset value is £400,000. Is member approval required?
Answer:
Yes. This is a disposal/acquisition involving a connected person (the CEO’s spouse) and a non-cash asset exceeding £5,000 and 10% of net assets (here, £60,000 > £5,000 and > 10% of £400,000), so it is a substantial property transaction requiring member approval by ordinary resolution (ss.190–191 CA 2006), unless an exception applies.
Worked Example 1.5
A 15% shareholder alleges the CEO diverted a company opportunity to a personal vehicle. The board refuses to sue. What is the most suitable remedy?
Answer:
A derivative claim may be appropriate, as the alleged conduct is a breach of directors’ duties (s.175). The member must seek permission, addressing mandatory and discretionary factors (ss.261–263). If the dispute is bound up with broader exclusion or breakdown in a quasi-partnership, an unfair prejudice petition may be preferable, often leading to a buy-out.
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 at meetings or by written resolution (private companies)
- Ordinary resolutions require a simple majority; special resolutions require 75%
- Show of hands is default; a poll (one vote per share) may be demanded and overrides the show of hands
- Written resolutions lapse after 28 days and cannot be used to remove a director or auditor
- Shareholders holding at least 5% can require a general meeting to be called; they can call it themselves if the board fails to do so
- Short notice for general meetings requires the consent of a majority in number holding at least 90% of voting rights (95% for public companies)
- Shareholders can appoint and remove directors by ordinary resolution (removal needs special notice and a meeting)
- Articles can be amended by special resolution, subject to bona fide/proper purpose limits
- Approval is required for certain transactions with directors or connected persons (SPTs, loans/quasi‑loans/credit transactions, long-term service contracts, loss of office)
- Remedies for minority shareholders include derivative claims, unfair prejudice petitions, and (exceptionally) just and equitable winding up
- Shareholders must comply with the constitution and exercise powers for proper purposes and in good faith
- Members have statutory rights to information and can circulate statements ahead of meetings in prescribed circumstances
Key Terms and Concepts
- shareholder
- ordinary resolution
- special resolution
- general meeting
- written resolution
- dividend
- derivative claim
- unfair prejudice
- articles of association