Shareholder Rights & Disputes

A share is essentially a unit of capital that expresses the ownership relationship between the company and its shareholders. 

Generally speaking, the more shares that you own, the more power you have to shape a company’s future. 

It’s common to see many different types of shares, such as ordinary shares, preference shares or redeemable shares. Each offers different rights and responsibilities to shareholders.

‘Alphabet’ shares have become increasingly common, where a class of shares (such as ordinary shares) is divided into ‘A’ shares, ‘B’ shares, ‘C’ shares and so on. Typically, the purpose of this is to allow the ‘A’, ‘B’ and ‘C’ shares to be treated differently in some way.

Typically, each shareholder has one vote. However, ‘bigger’ shareholders can influence proceedings by demanding a ‘poll vote’, where the total number of shares held decides the outcome. 

You don’t have to physically attend a General Meeting to cast your vote. This can be done by proxy via a form and meetings are now often held 'electronically'.

In private limited companies, shareholder resolutions are often passed using the ‘written resolution procedure’. Both the Board and shareholders can propose the passing of resolutions in this way.

Under the written resolution procedure, resolutions should be circulated to all eligible shareholders at the same time. They’re passed by reaching the necessary number of votes — irrespective of whether all shareholders have had a chance to weigh in.

Even if you own shares in a company, you can’t necessarily fully control its future. In the great majority of limited companies, you’ll own a large enough share to control the company with a shareholding of over 50% of the issued share capital.

Having control of the company gives you the power to play a decisive role in dictating the makeup of the board of directors, as well as to carry out most of the acts which are necessary to run the company in its everyday business, meaning you can ensure your interests are protected.

Owning less than 50% of a company doesn’t mean that you have no control. You’ll just have to act decisively to ensure that you aren’t left at the mercy of those who own more than 50% of the shares. 

In England and Wales, the responsibility for enforcing breaches of shareholder rights or company law falls on you and your fellow shareholders — so you need to be aware of the options available.

Various government agencies may also take enforcement action against company directors, depending on the nature of the wrongdoing. The Insolvency Service, for example, operates an Investigations and Enforcement team that’s often willing to take such action. Similarly, the Serious Fraud Office enforces bribery and corruption claims. The Police can take steps to enforce criminal conduct such as theft from the company.

As a shareholder, you have the right to take out civil proceedings to enforce your rights. In certain circumstances, you even have the right to pursue private prosecutions.

Knowing which steps are most appropriate — and making tactical decisions around when to deploy them — can be complex. Our team is on-hand to help.

When your shares are no longer benefiting you — or when you’re looking to capitalise on the value of the company or feel marginalised or forced out of the company — you may decide to sell your shares.

However, this can be trickier than you realise. There are various obstacles to overcome — both legal and political — to reach a successful outcome, including provisions in the company’s articles or shareholders’ agreement.

Unlike when a shareholder owns shares in a publicly listed company, there’s no ready market for shares in private limited companies. This can make it very difficult to sell the shares — or at least to sell them at anything that represents an accurate assessment of the true share value.

This can lead to situations where shareholders are 'locked in' to a company (often against their will) and although their shareholding may be very valuable on paper, they’re unable to realise that value (for example, by selling the shares).

Even once the question of value has been addressed, you should know that there can be other obstacles to selling a shareholding, such as pre-emption rights and the requirement for the board of directors to approve the registration of any sale.

Our team has experience in dealing with selling shares in private limited companies. We can advise you on the best strategy to take when you’re looking to sell, so that you can achieve your commercial objectives and maximise your returns.

When looking to sell your shares in a private limited company, it’s common to find that the company’s articles or shareholders agreement contain restrictions on the disposal transfer of shares. As an example, they may stipulate that only a certain class of individuals can hold shares in the company (such as the relatives of the original shareholders).

Restrictions on the transfer of shares take the form of 'rights of pre-emption', whereby the shares that are to be sold or transferred must first be offered for sale to a prescribed class of individuals (usually the other remaining shareholders). In effect, this means that you must offer a right of first refusal before you can sell the shares elsewhere or to someone who may be a 'stranger' to your remaining shareholders.

Pre-emption rights can have a dramatic effect on not only who you can sell to, but how much you can get for your shares — making it harder to earn a profit on your initial investment.

While a right of first refusal doesn’t in itself present any great problem if you want to sell your shares in a company, the catch is often what price you can sell for. In a typical right of pre-emption, the price to be paid by those exercising their right of first refusal is expressed to be a 'fair value' which — in the absence of any agreement — is independently determined, often by the company auditors.

Unless the shareholding represents a majority shareholding, a 'fair value' will normally include what could be a substantial discount on what the owner will normally regard as the 'real' value.

This is a 'minority discount', reflecting the fact that the shareholding isn’t a majority shareholding and doesn’t itself carry the ability to control the company. This can lead to substantial under valuations against what many would regard as the 'true' value of the shareholdings.

Let’s say that you’re a 49% shareholder in a £10m company and you’d like to sell your entire shareholding to the 51% majority shareholder. 

What might this look like in practice?

With the company valued at £10m, 49% of £10m would be £4.9m.

But let’s say that the minority discount comes in at 75%. The value of your shares would be £1.225m.

So, while the majority stakeholder might see a ‘true’ value of your shares at £4.9m or more, they would only have to pay £1.225m by reason of the calculation of a 'fair value' — putting you at a distinct disadvantage that makes it impractical to sell.

In a shareholder dispute, potential arguments over precisely what’s meant by ‘fair value’ can often be foreseen. The court has wide powers to direct which factors should be taken into account in determining any ‘fair value’.

In the absence of other guidance, the ‘fair value’ of shares is likely to be determined by whatever your valuer considers appropriate — so it’s key that you choose the right valuer.

A potential hurdle that you may face when you want to sell (or buy) shares in a limited company is the prospect that a company’s Board of directors may refuse to 'register' (recognise or ratify) a transfer of shares.

Where a transfer of shares has been made in accordance with a company's articles — and a duly completed and stamped stock transfer form is presented to the company for registration — the directors will only have the right to refuse to register the transfer if the company's articles allow for this.

The right to refuse to register transfers is actually quite common. In fact, the default model articles for companies contain exactly these kinds of restrictions.

Under current legislation, where the directors refuse to register a transfer of shares, the 'buyer' is entitled to receive information from the board regarding the reasons for the directors' refusal to register the transaction. In addition, the directors must also provide the ‘buyer’ with any further information on their decision to not register the transfer that the ‘buyer’ may reasonably request.

The purpose of a power to refuse to register a transfer is to protect the interests of a company’s shareholders as a whole. Directors should exercise that power honestly and in good faith — not arbitrarily or unreasonably. Directors who wish to refuse to register a share transfer must tread carefully, as those who fall foul can face a personal liability.

We deliver the knowledge, action and insight you need when it matters most, helping to secure your share purchase or protect the interests of your company’s shareholders.

Many small companies are regarded as 'quasi-partnerships' by UK law. This means that while they operate as limited companies, in practical terms they’re run as if they were a partnership between those individuals at the helm. 

Generally, a quasi-partnership exists where there is at least one of the following: 

• a relationship of trust and confidence between the shareholders
• an expectation that at least some will be involved in the management of the company
• restrictions on the transfer of shares.

Generally speaking, the courts are more willing to give certain additional rights and protections to minority shareholders in companies that qualify as quasi partnerships.

A minority shareholder in a quasi-partnership who has been involved in the running of the business can often claim protection from being ousted or excluded without any good reason from the ongoing management of the business.

We can help you to deal with issues related to quasi-partnerships and make informed decisions when it matters most, so that you can resolve disputes as quickly and effectively as possible.

The Companies Act 2006 states that where ‘unfair prejudice' can be established, the court “may make such order as it thinks fit” — meaning that the court has wide powers to make almost any order.

As a shareholder, it’s important to know that any complaint which alleges that a minority shareholder has been 'unfairly prejudiced' is classed as a lawsuit against the other shareholders in their personal capacities. This isn’t a claim brought against the company itself. You should be aware of this when deciding to become a shareholder.

However, in the majority of cases, the court will issue an order which states that one or more of the shareholders should purchase the shareholding of the other shareholder(s). These are commonly known as ‘buy out’ orders.

Typically, the court will order the majority shareholders to purchase the shareholding of the minority shareholder(s) at a ‘fair value’.

Should a shareholder dispute go to court, you need to know what you’re facing and how these cases typically work to ensure that you can protect your commercial interests.

It’s always possible to find a way to fund a worthwhile case. There are a range of available funding options to support minority shareholders who have limited funds or even no funds at all.

You may think that majority shareholders who control the company (and its finances) are at a substantial advantage when facing disputes with other shareholders, as they’ll typically try to use company funds to pay their legal and professional fees. 

However, in most genuine shareholder disputes, the courts won’t allow company money to be used to fund what’s essentially a personal battle. Courts recognise that companies don’t exist to solely serve majority shareholders and pay their personal costs. That’s why they’ll be willing to prevent any attempt to use company funds in a shareholder dispute — granting an injunction if necessary.

We have a strong track record in successfully supporting shareholders with a wide range of funding options. Talk to our team to find out more.

There are a number of vital steps that you should take when entering a shareholder dispute.

Firstly, you need to secure company assets and protect them from other shareholders. This may mean double checking (or changing) the company bank mandate, for example. You should also carry out checks to ensure that company monies haven't been paid to lawyers to fund the battle ahead.

It’s key to secure access to any information or documentation that could prove vital to proving your case. Documents and files that hold this information have a habit of mysteriously ‘going missing’. You may also need to consider regulating access to the company premises to secure the information needed.

It may prove difficult to take these steps without holding a controlling majority shareholding. The real power to take these steps lies with those who control the Board of directors — so securing control of the Board will be key to taking care of the practicalities.

At the outset of a shareholder dispute, there’s often confusion over precisely which rules govern the company in question. There may also be arguments about what has gone on in the company's past. Many of the answers to these matters will be found in the company's articles and statutory books and records.

For director shareholders who feel aggrieved or excluded by the actions of their fellow directors, one common mistake is that they resign their directorship prematurely. While there are occasions where resignation as a director may be appropriate, in most cases it can be a serious tactical error — not least since non-directors only have limited access to company records and information.

Our team knows how to help shareholders take care of these practicalities and protect themselves and their interests whether in an expected or unexpected dispute.

While there are mechanisms to protect minority shareholders in disputes, strict criteria apply — so you need to know how they work to make informed decisions.

If a dispute arises between shareholders, the key factors that can decide the outcome are the articles and section 994 of the Companies Act. 

The most relevant part of this provision states:

“A member of a company may apply to the court... for an order... on the ground that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members...”

You may have trouble in understanding the legalistic manner of this provision — many lawyers do — but essentially it seeks to protect minority shareholders from wrongdoing. This applies to those with a shareholding in a company of 50% or less, in situations where the controlling stakeholders seek to act in a way that’s 'unfairly prejudicial' to their interests.

In general terms, section 994 allows minority shareholders a ‘right to complain’ to the court if majority shareholders run the company in a way that damages their position or the value of their shareholding — something that’s often done deliberately by misapplying or misusing company assets.

You should know that a complaint of ‘unfairly prejudicial’ behaviour must stand up to objective analysis and can’t be ‘vague’ (for example, 'they're managing the business badly') or ‘trivial’ (for example, ‘the accounts were sent to me one day late’).

Examples of 'unfairly prejudicial' conduct might include using company assets or money for the personal benefit of a shareholder, or the majority shareholders paying themselves far more than people in their position could objectively justify.

It can be difficult to challenge what amounts to poor decision making by a company director. The courts are conscious that judges lack experience in running companies and often have no industry- or sector-specific knowledge relevant to the company. This means that courts are reluctant to second-guess business decisions.

However, careful analysis of poor business decisions can often reveal areas of wrongdoing where the courts will interfere and provide assistance. These areas may include, for example, illegality involved in ‘cutting corners’ or unlawful business practices, such as engaging in or encouraging bribery.

Placing an accurate value on a shareholding in a private limited company is tricky and requires specialist accountancy input.

Before you embark on any valuation process, it’s essential to choose the right valuer. You can’t assume that any old accountant is qualified or experienced enough to act as your valuer.

Obtaining an accurate valuation of a shareholding involves a number of factors that aren’t always immediately apparent, including:

• The appropriate date of valuation at which the valuation should be carried out.
• Whether a minority shareholder discount should be applied — and if so, at what rate?
• The correct basis of valuation.
• Whether there ought to be compensating adjustments — and if so, what?

A considerable number of court judgments have considered — often in great detail — the correct way of valuing company shareholdings. Most commonly, these judgments are concerned with arriving at what’s called the ‘fair value’.

We can help you to decide which valuer to appoint.

Share valuations require expertise and independence. Choosing a valuer can have a significant impact on the valuation of your shares — so it’s key that you make the right decision to protect your intestates.

It’s vital to choose an appropriately qualified valuer who has experience of the industry your company operates in and dealing with companies of that size and type. Other practical issues you need to take into consideration include the cost of the valuation.

Whenever the question of identifying a valuer arises, it’s normal for at least one party to suggest that the company auditors or accountants should carry out that role. The advantage of this route is that they’ll already be familiar with the company.

However, it’s often the case that company auditors or accountants can’t be truly independent. They may (whether consciously or subconsciously) have a natural allegiance to whichever individuals will remain in control after the valuation.

When there’s no agreement over the identity of the valuer, the most appropriate process is usually to jointly ask the current President of the Institute of Chartered Accountants in England and Wales (ICAEW) to independently identify a valuer and for the parties to be bound by this decision.

If you’re looking for a suitable valuer — experienced in valuing companies and shareholdings — we’re happy to make a suggestion to you.

Compensating adjustments are often used by the courts to ensure that your shares are assigned a fair value. It’s vital to know when these adjustments are likely to be applied.

You should be aware that in shareholder disputes the process of valuing a company or shareholding can be complicated by the misconduct or wrongdoings of others.

A common scenario is when majority shareholders abuse their control over the company. A director, for example, might have entered into a contract that involves substantial and excessive payments to themselves or a member of their family, which is a breach of their legal responsibilities.

That contract is obviously disadvantageous to the company and devalues the company itself. This will impact the value of your shares, so it’s in your best interest to ensure this issue is brought to light.

When there’s a dispute between shareholders, the court can order a valuation to take place on the hypothetical basis that such a contract had never been entered into. In other words, it can make a ‘compensating adjustment’ for the wrongdoing in question.

We deliver the knowledge, action and insight you need to familiarise yourself with compensating adjustments and help you to take advantage of this tool where possible. With our help, you’ll use every tool at your disposal to ensure that your shares are valued fairly.

The date of a shareholding valuation can impact the outcome. If an unfavourable date is chosen, the valuation could negatively affect the value of your shares.

If the buyer and seller agree on the date — or the sale occurs as a result of provisions set out in a company's articles — there’s normally no argument. 

However, if the valuation arises due to a shareholder dispute — for example, if the court has ordered one party to purchase the other’s shareholding — the date of the valuation becomes an important consideration.

Valuers often find it convenient to use the company's year-end date. This offers a point of reference, as while accounts may have already been drawn up by professionals by this time, this date may prove more advantageous to one shareholder than another.

Generally speaking, the courts will determine that the appropriate valuation date is one that’s as close as to the date of sale as possible to best reflect the value of what the shareholder is selling. The starting point is often the date of the court order itself — though if that proves to be unfair, the courts may choose other dates.

We can advise you on how best to choose an experienced valuer and navigate issues relating to the date of valuation to ensure that your shares are fairly valued.