Investing

Rights Of A Shareholder In Public & Private Companies

Cameron Fleming | 1 September 2022 | 2 years ago

Rights Of A Shareholder

As a shareholder in a public or private company, you have certain rights that are enshrined in UK business law. In general, shareholders have the same basic rights irrespective of whether the company is private or public with a few subtle differences. Shareholders’ rights are contingent on the rights or limitations attached to their shares under the company’s articles, but different shareholders can possess different rights, or be subject to different limitations. For this reason, it is important that you know your rights before you buy any shares or you could end up losing out.

In this article, we will discuss everything you need to know about the rights of a shareholder in public and private companies.

What Is A Shareholder?

A shareholder is a person, company, or institution that owns a minimum of one share of a company’s stock. Shareholders fundamentally own the company, which, in turn, results in distinct rights and responsibilities. Share ownership allows shareholders to benefit from the profits of a successful business. The benefits include dividends paid out for financial profits and increased stock valuations meaning you can sell them for more than you bought them. Alternatively, when financial losses are suffered by the company, the share price may potentially fall, causing shareholders to bear the losses. In general, shareholders play a significant role in ensuring that public and private companies are well-governed and operate in a transparent manner.

What Is A Public Company?

A public company is a corporation whose shares of stock are traded on public stock exchanges, making it available for public ownership. The main characteristic of a public company is that anyone can buy and sell its shares on the open market. A public company must report its financials to both its shareholders and the public, providing greater transparency than a private company. Being public also subjects a company to more stringent regulations, which can impact its ability to make decisions and respond to market conditions. As a result, public companies are often larger and more established than private companies. While going public has many advantages, it also carries some risks, which is why not all companies choose to do so. For example, public companies must have a minimum allotted share capital of a nominal value of at least £50,000, one-quarter of which must be paid up.

What Is A Private Company?

A private company is a business that is not publicly traded on the stock market. Private companies are typically owned by a small group of private investors, which can include the company’s founders, management, and employees.  They are not required to disclose their financial information to the public so they often have more flexibility than public companies when it comes to decision-making. However, private companies may have less access to capital than public companies which can limit their growth potential. There is no minimum share capital threshold for private companies.

Shareholders Have A Right To Company Information

What Are The Different Types Of Shares

Companies in the UK generally issue three types of shares – ordinary shares, preference shares and redeemable shares. Within each type of share, a company may choose to divide them into separate classes as well. There are several advantages to issuing different kinds of shares for both businesses and investors, including the flexibility to return capital to shareholders (other than via a dividend) and reducing investor risk.

Ordinary Shares

Simply put, shares are ordinary if they aren’t of a specific type, such as redeemable or preference shares. Ordinary shares are the most common type of share in the UK.  They may hold any value from a penny upwards and contain a wide range of rights relating to voting, capital, and dividends.

Preference Shares

Preference shares are often preferred to ordinary shares in terms of both dividends and capital, but they often do not provide the shareholder with the ability to vote. If the preference shares do provide voting rights, it is generally in a limited capacity. These shares typically entitle the shareholder to a fixed dividend, delivering the holder with a guaranteed fixed income from the shares. However, should the company’s success increase, the preference shareholder will not reap the benefits, as the dividend rate is fixed. Overall, these shares are a lower-risk investment than ordinary shares. They are often cheaper than ordinary shares and are therefore held in much greater volume than ordinary shares.

Redeemable Shares

These shares are most often used as a technique for returning surplus capital held by a company to shareholders without having to declare a dividend. Redeemable shares can be redeemed by the option of the issuer or by the shareholder. A company must have previously issued ordinary shares before it can issue redeemable shares. More often than not, these shares are issued as non-voting shares. The terms of redemption vary and may differ significantly from company to company. The articles of association of the company generally contain the terms, although it is possible that they can be left to the authority of the board.

Compliance with the 2006 Companies Act is mandatory when redeeming shares or the acquisition will be invalid. Redemptions that are found to be unlawful can put directors of the company in a situation of personal liability for a criminal offence. The shares must be paid in full in order to be redeemed. Finally, the board must approve the redemption and send a notice to the shareholder. It is not required to sign a stock transfer form and stamp duty is not payable following the redemption to HMRC.

Class Rights

A company can assign different classes to different shares. For example, a company may have A, B, and C classes of shares with each class having diverse benefits. The rights that can be attached to shares vary depending on the share class but there are three core rights that apply to all ordinary shares which relate to voting, dividends and a right to capital upon a sale or closure of a company. Class rights can generally be found in the company’s articles of association or shareholders’ agreements. There are no limits to the number of classes of shares a company can have

Should a company have multiple classes of shares, the company articles often include a provision to the effect that the consent of the holders of the first class of shares is required before the rights of other classes can be altered.  Contingent upon class rights, shareholders’ rights can be limited, modified or waived. Notwithstanding, shareholders shall not be financially responsible for more than the amount unpaid on their shares.

A company’s articles can also include entrenched provisions that can only be amended by agreement of all the company’s shareholders, regardless of class. For example, a company’s articles can entrench certain rights so that a set percentage of the shareholders must vote in favour of changing a right. Variations of rights are generally provided in the company’s articles.

Shareholder Voting Rights

Rights Of Minority Shareholders

The rights of minority shareholders will differ depending upon the percentage of shares/voting rights they hold:

If a shareholder holds at least 5% they have the right to:

  • call a general meeting
  • require the passing of a resolution at an annual general meeting (AGM) of a public company
  • apply to the court to prevent the conversion of a public company into a private company
  • require the circulation of a written resolution to shareholders (in private companies)
If a shareholder holds at least 10% they have the right to:

  • call for a poll vote on a resolution
If a shareholder holds more than 10% they have the right to:

  • prevent a meeting from being held on short notice (in private companies)
If a shareholder holds at least 15% they have the right to:

  • right to apply to the court to cancel a variation of class rights provided those shareholders did not consent to, or vote in favour of, the variation.
If a shareholder holds more than 25% they have the right to:

  • prevent the passing of a special resolution.
Shall a decision be thought to be unfairly prejudicial to minority shareholders, any shareholder can bring an unfair prejudice claim. There is no minimum shareholding required for bringing such measures.

Shareholders' Meeting rights

Meetings Of Shareholders

Public companies are required to hold an Annual General Meeting (AGM) every six months beginning with the day following their accounting reference date. While they can choose to do so, private companies are not required to hold an AGM.

Generally, the AGM addresses matters such as:

  • Electing or re-electing the company’s directors.
  • Approving the directors’ remuneration report and remuneration policy (if applicable)
  • Approving the company’s report and accounts.
  • Awarding permission for the directors to allot new shares.
  • Designating or re-designating auditors.
  • Disapplying pre-emption rights.
  • Affirming the company’s final dividend.
  • Authorizing the making of political donations.
  • Sanctioning amendments to the company’s articles of association.
  • Sanctioning the buying back of the company’s own shares.
Private companies have the ability to pass resolutions in writing to avoid the need for physical meetings. These are called written resolutions and they are not available to public companies. In this scenario, the written resolution is sent to all entitled shareholders to vote on the resolution. Shareholders then signal their agreement by signing and returning it to the company. The resolution can only be passed when a satisfactory amount of shareholders holding the required voting majority have signed the written resolution and returned it to the company.

Voting

To pass resolutions at general meetings, the voting requirements are as follows:

  • For ordinary resolutions, more than 50% (a simple majority) of those attending and entitled to vote.
  • For special resolutions, 75% of those attending and entitled to vote.
In general, a company’s articles will stipulate that each resolution put to the vote at a general meeting will be decided by a show of hands unless a poll is justly demanded. The company articles will declare who is eligible to call a poll.

Shareholders’ Rights In Regards To Meetings

A shareholder or group of shareholders representing at least 5% of voting rights can require the directors of the company to call a general meeting (section 303, CA 2006).  A shareholder is not permitted to ask a government body or court to call or intervene in a general meeting.

Should a public company’s shareholders want to circulate a resolution to bring to vote at an AGM, the shareholders can require the company to do so where the request is made by either:

  • Shareholders that represent at least 5% of the total voting rights of all shareholders who have a right to vote on the resolution.
  • At least 100 shareholders who have voting rights on the resolution at that meeting and hold shares that have been paid up an average of at least £100 per shareholder (section 338, CA 2006).
Shareholders hold Directors Is Accountable

Shareholders’ Rights Against Directors

Relating to the appointment of a director and the termination of that appointment, a company’s articles generally contain provisions for these circumstances. The standard model articles that apply to private and public companies by default under the CA 2006 provide that a director can be appointed through either:

  • An ordinary resolution (approval of more than 50% of the shareholders).
  • A determination of the board of directors.
A director will be automatically removed from office if the law prohibits the director from being a director or a bankruptcy order is made against the director.  A director can also be dismissed from office if the shareholders pass an ordinary resolution and observe the special notice period of 28 days and the relevant statutory procedure (section 168, CA 2006). For private companies, this decision cannot be taken by way of a written resolution.

Disclosure Of Information To Shareholders

Directors are required to disclose and provide certain information and documents to the company’s shareholders. Shareholders shall receive notice of shareholder meetings and the company’s reports and accounts.

All public companies and all large private companies are required to present a strategic report that includes, among other things, a section 172 statement setting out how the directors have had regard to the matters set out in section 172, CA 2006.

These matters include, but are not limited to:

  • the interests of the company’s employees
  • the need to advance the company’s business relationships with suppliers, customers and others
  • the effect of the company’s operations on the community and the environment.

Final Thoughts

As you can see, the rights of a shareholder in public and private companies can be complex at times. Hopefully, this article has helped to clarify any questions you may have had about your shareholder rights and given you more confidence moving forward in your investments. Best of luck!

Topic

Investing

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