Legal Update by Kelly Dickman, Associate in the Dispute Resolution team at Furley Page Solicitors. 

Shareholders are the essence of any company. They are your investors and your owners all rolled into one and as such are never far from the thoughts of the Board. But while directors have a duty to ensure the success of the company and exercise reasonable care and skill in the management of the company; shareholders do not.

There is no inherent duty placed upon a shareholder on their ascent to such a position. They are free to act as they wish towards the company both in word and deed. This can lead to some shareholders, particularly minority shareholders, running amok – causing reputational damage with their words and preventing the proper running of the company with their deeds.

Key ways a minority shareholder can affect the business

The level of damage a rogue shareholder can cause to the company will vary and depend greatly on the percentage of the company they own, as well as potentially their sway with the other shareholders.

Over 25% shareholding

Any shareholding over 25% can stop any special resolution as these require 75% of shareholders to vote for it. For example: amending the articles of association of the company; changing the company’s name; variation of rights of shareholders; and approval of schemes involving mergers or a division.

25% shareholding

A shareholder who holds 25% ownership stake in a company, may need to be identified by banking or other professional organisation before those organisations can act for the company. For example, if the company wishes to open a bank account with a new bank that is offering  better business rates for banking services or better loan terms, a 25% shareholder could refuse to co-operate with the bank and provide proof of identity. In this case the bank will not allow the company to open the new account, costing the company money as it cannot take advantage of the better rates and fees for its banking.

Over 10% shareholding

A shareholder who holds more than a 10% ownership stake in a company can request an audit of the annual accounts, which is an expense to the company and results in penalties if the request is not complied with. This is particularly relevant for companies who are usually exempt from providing audited accounts. Such a request from a qualifying shareholder overrides any exemption and the company must audit that current year’s accounts or be at risk of failing to file compliant accounts. Such a failure may result in a fine for the company of up to £3,000 and an unlimited fine to be borne personally by each director who approves the accounts.

Over 5% shareholding

A shareholder who holds more than a 5% ownership stake in a company has the right to compel the directors to call a general meeting and compel the directors to circulate a statement regarding resolutions to be discussed at the meeting or any other business. This allows them to have a voice and may allow them to influence other shareholders to act against the company.

Any shareholder

Any shareholder, no matter their level of ownership, has the right to bring a claim for alleged breaches of directors’ duties on behalf of the company or bring an unfair prejudice petition regarding the way in which the directors have managed the company. An unjust claim will negatively impact a company.

Further to which any shareholder, no matter their level of ownership, can also cause harm to a company’s reputation. As is often cited, the court of public opinion is fickle, but it will add greater weight to the words and opinions of a shareholder of a company than someone unassociated with the company. Such a shareholder can use their standing to infer that they know more about the business of the company than the public and use that implied position to make damaging accusations or release business sensitive information.

How to protect your company

However, there are ways to protect your company against such rogue shareholders. As with many things in life, prevention is better than cure and these measures can prevent conflict with your shareholders.

Shareholders Agreement

The most effective way of ensuring that your shareholders work for your company and not against it, is by way of a shareholder’s agreement.

A well drafted shareholders agreement will not only protect each of the shareholders, but the company as well, particularly where the company is a party to the agreement alongside its shareholders.

Key clauses to ensure the protection of the company would include ones which require the shareholders to keep company information confidential, to act in the best interests of the company as a whole and to ensure the success of the company – similar to the duties held by directors. It would also be advisable to include a ‘bad leaver’ provision, wherein any shareholder who breaches such provisions is held to be a ‘bad leaver’ and as such is required to sell their shares either to the remaining shareholders or back to the company, but is only entitled a nominal value for their shares rather than the full value. Hand in hand with this it is equally advisable to include provisions which set out a clear method for calculating the value of the shareholding for any shareholder who wishes or is required to sell their shares for any reason, save that of a ‘bad leaver’.

As and when new shareholders invest in the company, each one will need to sign a deed of adherence which in essence makes them a party to the shareholder’s agreement, meaning that they too are bound by it. This ensures that the company remains protected even as their shareholders may change.

Classes of shares

Another option for protection is to consider when issuing shares whether all shareholders should have the same class of shares. For example, whether all the shares should have the same rights attached to them i.e. voting rights, rights to dividends etc. By limiting the rights attached to each class of shares, a company may be more discerning in who has the right to affect the business of the company.

Maintain regular communication with shareholders

Many shareholder disputes and issues start from a lack of information or feeling, on behalf of the shareholder, that they are being left out of the loop. From there, they can imagine all sorts of untoward practices taking place.

The best way to ensure solidarity in the ranks, is to keep shareholders informed and, where possible, to consult with them on the key issues and decisions for the company. That is not to say that shareholders should run policy or the company, but by keeping them abreast of developments, allowing them a voice and listening to their concerns, many issues will be resolved before they become problematic and before legal intervention is required- allowing the Board to focus on the successful running of the company.

For expert legal advice on shareholder disputes contact our Dispute Resolution Team on 01227 763939.763939

For more information about Furley Page please visit www.furleypage.co.uk. You can also follow the firm on LinkedIn and Facebook.