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Minority Shareholder Rights – How to Protect your Interests and Investment

As a minority shareholder, understanding your rights is crucial in ensuring your interests and investment are protected. We set out below what those rights are, the common issues you may encounter and actionable steps to take to protect yourself.

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Rights of a Minority Shareholder

What Rights Do Minority Shareholders Have?

The rights of minority shareholders in any company are based on the constitution of the company, which is made up of its Articles of Association, its resolutions, shareholder agreements and associated documents such as directors’ service contracts.

Minority shareholders’ rights are also set in statute, most obviously the Companies Act 2006 but also other acts such as the Insolvency Act 1986. Also, common law, which is the law based on cases decided by the court that set a precedent for similar cases to follow.

Minority Shareholder Rights in the Model Articles of Association.

You can read the Model Articles of Association (Model Articles) by clicking HERE.

Under these Model Articles, minority shareholders have the following rights.

Part 4 Article 42 refers to minority shareholders having voting power proportional to their holdings, ensuring they can participate in the governance of the company.

Part 1 Article 4 (1) read in conjunction with Section 283(1) of the Companies Act 2006, specifies that a special resolution requires a 75% majority of the votes to pass. This provision can act as a safeguard against the majority’s dominance in key decisions.

Part 3 Article 30 talks to dividends which must be distributed fairly, preventing the majority from withholding or manipulating dividend payments to the detriment of minority shareholders.

Minority Shareholder Rights within a Shareholders Agreement

To see what terms are often included in a shareholder agreement to protect minority shareholders, please read our article on Understanding Shareholder Agreements

Minority Shareholder Rights Under the Companies Act 2006

Within the Companies Act 2006 minority shareholders are granted the following rights:

Financial Information

Inspection of Records (Section 116): Shareholders have the right to inspect the company’s records and financial information.

Access to Annual Accounts and Reports (Sections 423 and 431): Shareholders are entitled to receive and inspect the company’s annual accounts and reports.

Decision-Making and Meetings

Calling a General Meeting (Section 303): Shareholders holding at least 5% of voting rights can request a meeting.
Right to Require Circulation of a Written Resolution (Section 292): Shareholders with at least 5% of voting rights can propose written resolutions.

Blocking Special Resolutions (Section 283): Shareholders with 25% or more voting rights can block special resolutions, requiring a minimum of 75% approval to pass.

Right to Receive Notice of Meetings (Section 310): Ensures shareholders are properly informed of general meetings.

Dividends and Shares

Right to Dividends (Sections 830 and 831): Shareholders are entitled to dividends if declared, according to their share class.

Pre-emption Rights (Section 561): Shareholders have the right of first refusal on new shares issued, protecting them from undue dilution.

Rights in Takeover Situations (Section 983): In a takeover bid where the offeror acquires 90% of shares, minority shareholders can require the offeror to buy their shares on the same terms as those who accepted the offer.

Remedies

Right to Petition Against Unfair Prejudice (Section 994): Allows minority shareholders to petition the court if the company’s actions are unfairly prejudicial to their interests.
Derivative Claims (Sections 260-264): Enables shareholders to sue on behalf of the company if directors act improperly.

Protection Against Wrongful or Fraudulent Trading (Sections 172 and 174): Allows shareholders to seek recourse if directors trade irresponsibly, particularly during insolvency.

Objection to Scheme of Arrangement (Section 899): Although not an explicit right, minority shareholders can raise concerns about fairness during the court approval stage for a scheme of arrangement.

Objection to Capital Reduction (Section 641): While they cannot block it outright, minority shareholders can object during court proceedings if the reduction of capital is deemed prejudicial.

Minority Shareholder Rights

Problems Faced by Minority Shareholders

Below we set out the most common problems encountered by minority shareholders and the remedies available under the law.

Not Receiving any financial or management information

Minority shareholders often find themselves excluded from vital financial or management information about the company. This can make it challenging to assess the company’s performance. Particularly important if you are trying to determine whether or not you are receiving the dividends you should.

Under the Companies Act 2006, shareholders have statutory rights to certain information. For instance, Section 431 entitles shareholders to receive a copy of the company’s annual accounts and reports. Additionally, under Section 388, shareholders have the right to inspect the company’s records and accounting documents.

If access is refused, shareholders can apply to the court to enforce these rights and obtain an order compelling the company to provide the requested information. This ensures transparency and accountability from the directors.

Not being paid Dividends

If the company is not declaring any dividends, you need to see the financial information of the company. Please read the section above.

If a dividend is declared, that is a different situation. Declaring the dividend creates a debt owed by the company to each shareholder.

If the directors are not paying dividends when they should, as a minority shareholder you can issue a Section 994 petition (often called minority shareholder or unfair prejudice petitions) for those dividends to be paid, if you are able to show that it is unfair not to and that non-payment is prejudicial to your interests. Read more on Unfair Prejudice Petitions.

Shareholding losing Value to Mismanagement

For mismanagement by directors to be actionable, it must go beyond mere poor judgment; it typically involves a breach of directors duties or fiduciary duties or negligence that harms the company and leads to a decline in the value of shareholders’ investments. Read more in our article on Director’s duties and Fiduciary duties.

Where mismanagement has directly harmed the company, a shareholder can bring a Derivative Claim, on behalf of the company under Sections 260–264 of the Companies Act 2006.

Dismissed as a Director and Excluded from all Decision Making

A common problem faced by minority shareholders is being removed from the board and excluded from any role in decision-making, often to limit their influence within the company. If a shareholder is unfairly removed as a director, they may file an unfair prejudice petition under Section 994 of the Companies Act. This provision allows minority shareholders to seek relief if the company’s affairs are being conducted in a way that unfairly prejudices their interests.

In these cases, the court may order remedies such as reinstating the director, issuing compensation, or even ordering a buyout of the minority shareholder’s shares at a fair value. Read more about Unfair Prejudice Petitions.

Legal Remedies for Minority Shareholders

Derivative Claims Against Directors On Behalf of the Company

If a company’s directors are acting in breach of their directors’ duties to the company, minority shareholders have the right to ask the court for permission to bring a claim against directors on behalf of the company. This is called a Derivative Claim. This action gives you as a minority shareholder, the ability to seek remedies on the company’s behalf, addressing the issues and recouping the losses caused by failing or dishonest directors. Read more about Derivative Claims.

Section 994 Petitions

Shareholders can file a Section 994 petition when the company’s actions unfairly prejudice their rights, such as by excluding them from decision-making or withholding dividends. The court may order a number of different remedies. The most common one granted is for an order that the company or other shareholders must buy your shares at a fair price. Read our article on Unfair Prejudice Petitions.

Just and Equitable Winding-Up- Section 122(1) (g) of the Insolvency Act 1986

Minority shareholders can seek to have a company wound up if they can prove that it would be “just and equitable” to do so under section 122 (1) (g) of the Insolvency Act 1986. This route is often pursued in situations where there has been serious misconduct by directors, a breakdown in trust, or exclusion from management, especially if the company is a “quasi-partnership,” meaning it was initially run with an expectation of mutual trust.

Courts have considered several circumstances under which a “just and equitable” winding-up might apply some examples are:

Deadlock in the management of the company, making it impossible for the business to be carried on effectively.

Loss of mutual trust and confidence between shareholders, particularly in small, closely held companies.

Exclusion from management or other conduct that is unfairly prejudicial to minority shareholders’ rights and expectations.

Winding-up petitions are more likely to succeed when there’s significant evidence that no other resolution would fairly protect the shareholder’s interests. Courts tend to prefer a remedy that allows the company to continue operating,

Before pursuing a winding-up petition, it is best to consider whether a Section 994 Petition is best.

Can Minority Shareholders be Made to Sell Their Shares?

If you as a minority shareholders are being pressured to sell your shares, the default position is that you are not obliged to do so.

You must review your shareholder agreement, if you have one. Our article on Shareholder Agreements has more information. Look also at the company’s articles of association for any “buy-out” provisions. If there are buy out provisions in these documents, then you will have to sell as long as the majority shareholders follow the correct procedure.

If there aren’t any buy out provisions then you don’t have to sell.

In very limited circumstances, majority shareholders can compel minority shareholders to sell but to do so they must rely on very specific provsions. The court actions required for them to obtain such an order are lengthy and costly. The chances are that you are being pressured without any real threat to back this up.

Keep A Clear Mind

Having an objective view of a dispute will give you a great advantage. We are usually good at controlling our emotions (even if others aren’t) but it’s also important to recognise when feelings and emotions are affecting our decision making.

Living in denial; pretending bad behaviour isn’t happening, believing it is acceptable or rationalising it and hoping a situation will sort itself out, is common but only makes matters worse.

The short video below provides more information on dealing with difficult situations, including when you are a minority shareholder.

Any questions?

Inevitably, you will have more questions and we welcome all serious enquiries.

Litigation is not something to be undertaken lightly. It does have significant cost and time implications.

Christopher Burgon Solicitors Litigation Specialists

60 Gray’s Inn Road
London
WC1X 8AQ

+44 (0)20 3150 2987
legal@christopherburgon.co.uk

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Unfair Prejudice Petitions – Resolution for minority shareholders and 50/50 shareholders?

How to use your power in a director/shareholder dispute.

Minority Shareholder Rights

Minority Shareholder Rights – How To Protect Your Interests and Investment

How to use your power in a director/shareholder dispute.

Derivative Claims

A Derivative claim is a court action that allows someone with an interest in a company to bring an action on behalf of that company against a party that has caused a loss to it, such as its directors or other shareholders.

Director and Shareholder Disputes Articles, Slider

Directors duties and Fiduciary duties

Directors can face many different types of claims for personal liability for wrongdoing whilst managing the company. Examples of where a director may incur personal liability include but are not limited to, the following...

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