Shareholder´s Rights
ND PHARMA & BIOTECH COMPANY GENERAL INFORMATION RIGHTS
for Shareholders, Investors and Partners over the structure and function of a
Private Limited Company
Introduction.
Going into business with others is the commercial equivalent of getting married; and the divorces which often follow can be just as painful as a marriage breakdown.So it is essential to treat any business venture just as seriously as getting married.There may be no such thing as a legally binding pre-nuptial agreement in English law, however, in business, there are steps you can take to best protect your position. Similarly, if business relationships break down, failing to get good advice at an early stage could cost you dearly. This page aims to outline the legal position of shareholders in a Private Limited Company, the pitfalls, the precautions that can be taken and what can be done if it all goes sour.
Company Structure
Some shareholders find it difficult to grasp the concept that company property, assets and money belonging to the company are not the property of the shareholder(s) (often also called 'members'), even if the company in question is 100% owned by the shareholder(s). Companies are what lawyers call 'separate legal entities'. In other words, they have their own legal identity, they can own property, enter into contracts and sue/be sued in their own right. Each company in England and Wales is given a unique company number by Companies House and will retain (and be identified by) the same company number throughout its existence, no matter how many times the company changes its name.
Directors and Company Secretary
Modern companies must have at least one Director who is a 'natural' person (i.e. a human being) at all times. The old practice of only having limited companies registered as directors has now been made unlawful.There is no legal limit to the number of Company Directors that can be appointed, although a company's own regulations may regulate the maximum or minimum number of Directors. The latest Companies Act has brought in a new minimum age for a director (16 years old). The old requirement to have a Company Secretary has become optional for private companies.
Shares
A commercial company must have at least one issued share, but typically they have many issued shares.
Company Books / Records
A company must keep written books/records of the following matters:
Memorandum / Articles of Association
Every private limited company in England and Wales has its own 'Articles of Association' and 'Memorandum of Association'. These are often simply referred to as 'the Articles' or 'the Memorandum'. Together, these documents form the 'constitution' of the company and regulate the powers of the company and the rights of its shareholders. Generally speaking, in modern companies, the Memorandum of Association is now of less importance than it once was but a company's Articles of Association remain fundamental in regulating how a company lawfully goes about its business and what rights its shareholders have.
There is no standard prescribed form of Articles of Association and it is therefore essential to obtain an up to date copy of a company's Articles (available from Companies House) before any analysis of a company's legal position or the position of its shareholders. Whilst general statements about shareholder rights can be made, these are almost always subject to alteration by the company's Articles of Association
Shareholders ("General") Meetings
Private companies no longer need hold Annual General Meetings ('AGM') unless required to do so by their Articles. The old statutory requirement to hold AGMs has now gone. Equally, the term 'Extraordinary General Meeting' (otherwise know as an 'EGM') is no longer used and has been simply replaced with the term 'General Meeting'.
A General Meeting is simply a meeting of shareholders. Generally, a Company must give 21 days notice to its shareholders if it is calling an AGM or a General Meeting. However, this can be reduced to 14 days in certain cases. Equally, it increases to 28 clear days notice in other specific situations.
A typical AGM will merely involve a vote to appoint or re-appoint Company Auditors and will 'lay before' the shareholders a copy of the last year's accounts. Contrary to popular belief, the shareholders are not asked to approve the accounts - they are merely provided with a copy of the accounts for information - although they can ask questions on matters contained within the accounts. However, there may be additional matters on which a vote is required (the Notice calling the meeting will tell you this). There are now specific provisions setting out a basic level of detail and information that must be included on each notice of a General Meeting.
Normally voting will be by a show of hands and, as such, each shareholder has only one vote irrespective of the number of shares held, but a shareholder can demand that a 'poll' vote is taken and a poll vote will count votes in proportion to the number of shares held by each shareholder. In this way the 'bigger' shareholders can make the size of their shareholding count. In many cases, a shareholder need not physically attend a General Meeting in person to be able to vote as voting can be done by 'proxy' - a form which the shareholder can complete and return before the Meeting. In fact, there are now provisions to enable meetings to be held 'electronically' and these may become increasingly common.
SHAREHOLDER´S RIGHTS
In practice, the strict rights and entitlements that come with the ownership of shares in a Limited Company are seldom fully exploited or utilised by shareholders. This is largely because shareholders are generally unaware of the rights that they have simply by virtue of being a shareholder. Similarly, most Company Directors would be alarmed at the strict obligations that they have as regards the Company's shareholders, which include maintaining a Register of Directors / Secretaries, a Register of Shareholders, a Register of Director's Interest in Shares, a Register of Charges and Minute Books. These must be kept open to inspection by shareholders.
More shares, more power
It may seem an obvious statement but the greater the shareholding of an individual, the greater are his / her rights and the greater is his / her power within the Company.
This is so not only because the larger the shareholding the more likely it is to represent a controlling interest, but also because the Companies Act affords greater rights and power to an individual as the size of his / her shareholding increases. For example, a shareholder owning 5% of a company has the right to have an item placed on the Agenda for discussion at a General Meeting and, once the shareholder's ownership reaches 10% of the company, he / she has greater rights including the right to force a formal audit of the annual accounts.
Controlling interest
In the great majority of Limited Companies, a shareholding in excess of 50% of the issued share capital will be enough to control the company, dictate the makeup of the Board of Directors and to be able to do most of the acts necessary to run the company in its everyday business.
It is possible for those owning less than 50% of a company to protect themselves from being at the mercy of those holding over 50% of the shares in the company and this is one reason why shareholders should give serious consideration to agreeing a shareholders agreement or adopting professionally drafted Articles of Association.
Selling your shareholding
The Market for Shares
Unlike Public Limited Companies (Plcs), shareholdings in Private Limited Companies are not readily available to the public. Just as Joe Public cannot readily buy shares in a Private Limited Company, any shareholder in a Private Limited Company cannot readily sell those shares to Joe Public. 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 are unable to realise that value (by selling the share, for example). Even if a buyer can be found, shareholders often then face a number of further hurdles before any sale to that buyer can proceed.
Pre-emption RightsThe problems faced in trying to realise the value of a shareholding in a Private Limited Company can be made all the more difficult by provisions in the Companies Articles or (if there is one) in a Shareholders Agreement.
In particular, it is very common to find that these documents contain further restrictions on the disposal transfer of shares. For example, they may provide that only a certain class of individuals can hold shares in the Company (such as the relatives of the original shareholder(s)). Most commonly, restrictions on the transfer of shares take the form of 'rights of pre-emption' whereby the shares which are to be sold / transferred must first be offered for sale to a prescribed class of individuals (normally the other remaining shareholders). This is, in effect, a right of first refusal before the shares can be sold elsewhere or to someone who may be a 'stranger' to the remaining shareholders.
Share Value
A right of first refusal in itself does not present any great problem to a 'want out' shareholder, but the catch often comes in the price to be paid. 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' (to be independently determined in the absence of any agreement, often by the company auditors). Unless the shareholding to be sold represents a majority shareholding in the company, a 'fair value' will normally include what could be a very substantial discount on what the owner will normally regard as the 'real' value. This is known as a 'minority discount' and it seeks to reflect the fact that the shareholding is not a majority shareholding and does not therefore in itself carry the ability to control the Company. This can lead to seemingly harsh results and substantial under valuations against what many would regard as the 'true' value of the shareholding.
Non-Registration
A further difficulty sometimes faced in seeking to sell a minority shareholding is that the Articles of Association for many companies will also contain provisions enabling the Board of Directors to refuse to 'register' (in broad terms to recognise or ratify) a transfer of shares 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.
Shareholder disputes
Section 994 Companies Act 2006If a dispute arises between shareholders, after considering the small print of the Company's Articles of Association, probably the next most important legal principle for any shareholder to understand is Section 994 of the Companies Act 2006.
The most relevant part of the provision states as follows:-
'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...' [emphasis added; a 'member' is simply a shareholder]
The section is, in itself, worded in a very legalistic manner and many lawyers find it difficult to understand, so what chance does the layman have?
What the section seeks to do is protect minority shareholders (those with a 50% shareholding or less) in circumstances where the majority shareholders seek to act in a way which is 'unfairly prejudicial' to their interests. So the provision protects minority shareholders from 'unfairly prejudicial' conduct, but what is that?
It would be impossible to accurately reduce to only a few words the many legal authorities on precisely what conduct is classed as 'unfairly prejudicial', but in very general terms it means that minority shareholders have a right to complain to the court if the majority shareholder(s) run the Company in a manner that damages their position and the worth of their shareholding, often done deliberately and often by misapplying or misusing Company assets.
But the complaint cannot be vague or trivial (e.g. 'they're managing the business badly') and must stand up to some objective analysis. Examples of 'unfairly prejudicial' conduct might be using company assets or money for the personal benefit of a shareholder or the majority shareholder(s) paying themselves far more than people in their position could objectively justify.
"Quasi-partnerships"
Many small companies are regarded by the law as 'quasi-partnerships' - in other words, they are, in effect, small partnerships of a limited number of individuals which, although operating as a limited company, are in practical terms run as if they were a partnership between those individuals at the helm. Commonly, these businesses were originally run as a partnership and later incorporated to become a limited Company. The significance of the status of a 'quasi-partnership' is that the courts are, generally speaking, more willing to give certain additional rights to minority shareholders in those Companies. In particular, a minority shareholder in a 'quasi-partnership', who have been involved in the running of the business, can often claim protection from being ousted or excluded from the ongoing management of the business (without any good reason).
Court Orders protecting shareholders
Any complaint alleging a minority shareholder has been 'unfairly prejudiced' is a law suit brought against the other shareholders in their personal capacity. Where 'unfair prejudice' can be established, the Companies Act 2006 provides that the court 'may make such order as it thinks fit'. Although this means the court has very wide powers to make almost any order, by far the most common order made by the court is an order that one or more of the shareholders should purchase the shareholding of the other shareholder(s).Normally, the court will order the majority shareholders must purchase the shareholding of the minority shareholder(s) at a 'fair value' [see the 'Valuing your shareholding' section].
Identifying a Valuer
Choosing the identity of a valuer can have a significant impact upon the ultimate valuation arrived at. It is always important to identify an appropriately qualified valuer who has experience of not only the relevant industry in which the company operates but also has experience of dealing with companies of that size and type. Practical considerations, such as the cost of the valuation, are also of obvious relevance. Whenever the question of identifying a valuer arises, it is normal for at least one or other party to suggest that the company auditors or accountants should carry out that role. This has obvious attractions in that the company auditors / accountants will be fully familiar with the company already and this in itself will also help to keep down costs. However, in practice, it may well be that the company auditors / accountants cannot be truly independent or, at least, cannot be seen to be truly independent as they may well (consciously or sub-consciously) have a natural allegiance in favour of whichever individual(s) will remain in control of the company after the valuation. After all, they will be the individual(s) who will determine whether or not the auditors / accountants are reappointed in future years. In the absence of any agreement on the identity of a valuer, the most appropriate course of action is normally to agree that the parties should ask the President for the time being of the Institute of Chartered Accountants in England and Wales to independently identify a valuer and for the parties to be bound by his / her decision. f you are looking for a suitable valuer, experienced in valuing Companies and shareholdings, why not contact us and we will be happy to suggest an appropriate valuer to you.
Going into business with others is the commercial equivalent of getting married; and the divorces which often follow can be just as painful as a marriage breakdown.So it is essential to treat any business venture just as seriously as getting married.There may be no such thing as a legally binding pre-nuptial agreement in English law, however, in business, there are steps you can take to best protect your position. Similarly, if business relationships break down, failing to get good advice at an early stage could cost you dearly. This page aims to outline the legal position of shareholders in a Private Limited Company, the pitfalls, the precautions that can be taken and what can be done if it all goes sour.
Company Structure
Some shareholders find it difficult to grasp the concept that company property, assets and money belonging to the company are not the property of the shareholder(s) (often also called 'members'), even if the company in question is 100% owned by the shareholder(s). Companies are what lawyers call 'separate legal entities'. In other words, they have their own legal identity, they can own property, enter into contracts and sue/be sued in their own right. Each company in England and Wales is given a unique company number by Companies House and will retain (and be identified by) the same company number throughout its existence, no matter how many times the company changes its name.
Directors and Company Secretary
Modern companies must have at least one Director who is a 'natural' person (i.e. a human being) at all times. The old practice of only having limited companies registered as directors has now been made unlawful.There is no legal limit to the number of Company Directors that can be appointed, although a company's own regulations may regulate the maximum or minimum number of Directors. The latest Companies Act has brought in a new minimum age for a director (16 years old). The old requirement to have a Company Secretary has become optional for private companies.
Shares
A commercial company must have at least one issued share, but typically they have many issued shares.
Company Books / Records
A company must keep written books/records of the following matters:
- - Register of Directors/Secretaries
- - Register of Shareholders
- - Register of Director's interests in shares
- - Register of Charges
- - Minute Books
- - Adequate accounting records
- - Copies of Directors' service contracts or a written record of Directors employment terms
Memorandum / Articles of Association
Every private limited company in England and Wales has its own 'Articles of Association' and 'Memorandum of Association'. These are often simply referred to as 'the Articles' or 'the Memorandum'. Together, these documents form the 'constitution' of the company and regulate the powers of the company and the rights of its shareholders. Generally speaking, in modern companies, the Memorandum of Association is now of less importance than it once was but a company's Articles of Association remain fundamental in regulating how a company lawfully goes about its business and what rights its shareholders have.
There is no standard prescribed form of Articles of Association and it is therefore essential to obtain an up to date copy of a company's Articles (available from Companies House) before any analysis of a company's legal position or the position of its shareholders. Whilst general statements about shareholder rights can be made, these are almost always subject to alteration by the company's Articles of Association
Shareholders ("General") Meetings
Private companies no longer need hold Annual General Meetings ('AGM') unless required to do so by their Articles. The old statutory requirement to hold AGMs has now gone. Equally, the term 'Extraordinary General Meeting' (otherwise know as an 'EGM') is no longer used and has been simply replaced with the term 'General Meeting'.
A General Meeting is simply a meeting of shareholders. Generally, a Company must give 21 days notice to its shareholders if it is calling an AGM or a General Meeting. However, this can be reduced to 14 days in certain cases. Equally, it increases to 28 clear days notice in other specific situations.
A typical AGM will merely involve a vote to appoint or re-appoint Company Auditors and will 'lay before' the shareholders a copy of the last year's accounts. Contrary to popular belief, the shareholders are not asked to approve the accounts - they are merely provided with a copy of the accounts for information - although they can ask questions on matters contained within the accounts. However, there may be additional matters on which a vote is required (the Notice calling the meeting will tell you this). There are now specific provisions setting out a basic level of detail and information that must be included on each notice of a General Meeting.
Normally voting will be by a show of hands and, as such, each shareholder has only one vote irrespective of the number of shares held, but a shareholder can demand that a 'poll' vote is taken and a poll vote will count votes in proportion to the number of shares held by each shareholder. In this way the 'bigger' shareholders can make the size of their shareholding count. In many cases, a shareholder need not physically attend a General Meeting in person to be able to vote as voting can be done by 'proxy' - a form which the shareholder can complete and return before the Meeting. In fact, there are now provisions to enable meetings to be held 'electronically' and these may become increasingly common.
SHAREHOLDER´S RIGHTS
In practice, the strict rights and entitlements that come with the ownership of shares in a Limited Company are seldom fully exploited or utilised by shareholders. This is largely because shareholders are generally unaware of the rights that they have simply by virtue of being a shareholder. Similarly, most Company Directors would be alarmed at the strict obligations that they have as regards the Company's shareholders, which include maintaining a Register of Directors / Secretaries, a Register of Shareholders, a Register of Director's Interest in Shares, a Register of Charges and Minute Books. These must be kept open to inspection by shareholders.
More shares, more power
It may seem an obvious statement but the greater the shareholding of an individual, the greater are his / her rights and the greater is his / her power within the Company.
This is so not only because the larger the shareholding the more likely it is to represent a controlling interest, but also because the Companies Act affords greater rights and power to an individual as the size of his / her shareholding increases. For example, a shareholder owning 5% of a company has the right to have an item placed on the Agenda for discussion at a General Meeting and, once the shareholder's ownership reaches 10% of the company, he / she has greater rights including the right to force a formal audit of the annual accounts.
Controlling interest
In the great majority of Limited Companies, a shareholding in excess of 50% of the issued share capital will be enough to control the company, dictate the makeup of the Board of Directors and to be able to do most of the acts necessary to run the company in its everyday business.
It is possible for those owning less than 50% of a company to protect themselves from being at the mercy of those holding over 50% of the shares in the company and this is one reason why shareholders should give serious consideration to agreeing a shareholders agreement or adopting professionally drafted Articles of Association.
Selling your shareholding
The Market for Shares
Unlike Public Limited Companies (Plcs), shareholdings in Private Limited Companies are not readily available to the public. Just as Joe Public cannot readily buy shares in a Private Limited Company, any shareholder in a Private Limited Company cannot readily sell those shares to Joe Public. 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 are unable to realise that value (by selling the share, for example). Even if a buyer can be found, shareholders often then face a number of further hurdles before any sale to that buyer can proceed.
Pre-emption RightsThe problems faced in trying to realise the value of a shareholding in a Private Limited Company can be made all the more difficult by provisions in the Companies Articles or (if there is one) in a Shareholders Agreement.
In particular, it is very common to find that these documents contain further restrictions on the disposal transfer of shares. For example, they may provide that only a certain class of individuals can hold shares in the Company (such as the relatives of the original shareholder(s)). Most commonly, restrictions on the transfer of shares take the form of 'rights of pre-emption' whereby the shares which are to be sold / transferred must first be offered for sale to a prescribed class of individuals (normally the other remaining shareholders). This is, in effect, a right of first refusal before the shares can be sold elsewhere or to someone who may be a 'stranger' to the remaining shareholders.
Share Value
A right of first refusal in itself does not present any great problem to a 'want out' shareholder, but the catch often comes in the price to be paid. 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' (to be independently determined in the absence of any agreement, often by the company auditors). Unless the shareholding to be sold represents a majority shareholding in the company, a 'fair value' will normally include what could be a very substantial discount on what the owner will normally regard as the 'real' value. This is known as a 'minority discount' and it seeks to reflect the fact that the shareholding is not a majority shareholding and does not therefore in itself carry the ability to control the Company. This can lead to seemingly harsh results and substantial under valuations against what many would regard as the 'true' value of the shareholding.
Non-Registration
A further difficulty sometimes faced in seeking to sell a minority shareholding is that the Articles of Association for many companies will also contain provisions enabling the Board of Directors to refuse to 'register' (in broad terms to recognise or ratify) a transfer of shares 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.
Shareholder disputes
Section 994 Companies Act 2006If a dispute arises between shareholders, after considering the small print of the Company's Articles of Association, probably the next most important legal principle for any shareholder to understand is Section 994 of the Companies Act 2006.
The most relevant part of the provision states as follows:-
'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...' [emphasis added; a 'member' is simply a shareholder]
The section is, in itself, worded in a very legalistic manner and many lawyers find it difficult to understand, so what chance does the layman have?
What the section seeks to do is protect minority shareholders (those with a 50% shareholding or less) in circumstances where the majority shareholders seek to act in a way which is 'unfairly prejudicial' to their interests. So the provision protects minority shareholders from 'unfairly prejudicial' conduct, but what is that?
It would be impossible to accurately reduce to only a few words the many legal authorities on precisely what conduct is classed as 'unfairly prejudicial', but in very general terms it means that minority shareholders have a right to complain to the court if the majority shareholder(s) run the Company in a manner that damages their position and the worth of their shareholding, often done deliberately and often by misapplying or misusing Company assets.
But the complaint cannot be vague or trivial (e.g. 'they're managing the business badly') and must stand up to some objective analysis. Examples of 'unfairly prejudicial' conduct might be using company assets or money for the personal benefit of a shareholder or the majority shareholder(s) paying themselves far more than people in their position could objectively justify.
"Quasi-partnerships"
Many small companies are regarded by the law as 'quasi-partnerships' - in other words, they are, in effect, small partnerships of a limited number of individuals which, although operating as a limited company, are in practical terms run as if they were a partnership between those individuals at the helm. Commonly, these businesses were originally run as a partnership and later incorporated to become a limited Company. The significance of the status of a 'quasi-partnership' is that the courts are, generally speaking, more willing to give certain additional rights to minority shareholders in those Companies. In particular, a minority shareholder in a 'quasi-partnership', who have been involved in the running of the business, can often claim protection from being ousted or excluded from the ongoing management of the business (without any good reason).
Court Orders protecting shareholders
Any complaint alleging a minority shareholder has been 'unfairly prejudiced' is a law suit brought against the other shareholders in their personal capacity. Where 'unfair prejudice' can be established, the Companies Act 2006 provides that the court 'may make such order as it thinks fit'. Although this means the court has very wide powers to make almost any order, by far the most common order made by the court is an order that one or more of the shareholders should purchase the shareholding of the other shareholder(s).Normally, the court will order the majority shareholders must purchase the shareholding of the minority shareholder(s) at a 'fair value' [see the 'Valuing your shareholding' section].
Identifying a Valuer
Choosing the identity of a valuer can have a significant impact upon the ultimate valuation arrived at. It is always important to identify an appropriately qualified valuer who has experience of not only the relevant industry in which the company operates but also has experience of dealing with companies of that size and type. Practical considerations, such as the cost of the valuation, are also of obvious relevance. Whenever the question of identifying a valuer arises, it is normal for at least one or other party to suggest that the company auditors or accountants should carry out that role. This has obvious attractions in that the company auditors / accountants will be fully familiar with the company already and this in itself will also help to keep down costs. However, in practice, it may well be that the company auditors / accountants cannot be truly independent or, at least, cannot be seen to be truly independent as they may well (consciously or sub-consciously) have a natural allegiance in favour of whichever individual(s) will remain in control of the company after the valuation. After all, they will be the individual(s) who will determine whether or not the auditors / accountants are reappointed in future years. In the absence of any agreement on the identity of a valuer, the most appropriate course of action is normally to agree that the parties should ask the President for the time being of the Institute of Chartered Accountants in England and Wales to independently identify a valuer and for the parties to be bound by his / her decision. f you are looking for a suitable valuer, experienced in valuing Companies and shareholdings, why not contact us and we will be happy to suggest an appropriate valuer to you.
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ND Pharma & Biotech Company is a Private-held,
Family-owned, Financially-stable Global Company. We do not take unnecessary financial risks to protect what is more important to all of us, company´s future. |
