How to protect your position as a minority shareholder

If you are a minority shareholder, you have limited automatic rights and protections in law, so a well-drafted shareholders’ agreement is essential to protect your position. A clear and thought through agreement can also help avoid conflict between shareholders.

Here, we look at some of the ways minority shareholders can secure additional contractual protections.

What legal rights does a minority shareholder automatically have?

The quick answer is: very few. A minority shareholder will have some limited legal rights including:

  • The right to some company information such as annual accounts and reports for each financial year and meeting records, with limitations.
  • A right to vote on resolutions and decisions to be taken at general meeting, subject to the percentage of shares held and the rights attaching to those shares.
  • A right to receive dividends if they are declared by the company.
  • Some rights to block actions of the majority shareholders – but these vary depending upon how large a share the minority shareholder owns.

Because these rights are so limited, a minority shareholder will often seek to secure additional contractual protections, and these are usually set out in the shareholders’ agreement.

How would a minority shareholder identify the contractual protections they may need?

Every business is different, with unique goals, and so the ways in which a minority shareholder may seek to strengthen their position will vary. Often, they will be looking for a greater degree of control over the company so that they can protect their interests. These could relate to aspects of the running of the business such as its overall business plan, how profits are distributed, the appointment of directors, decisions on acquiring other companies or selling assets, and much more.

The advice of a corporate law specialist will be invaluable in helping you to understand what the potential “danger points” may be for a minority shareholder, and how best to word a shareholders’ agreement to mitigate against them.

What are the most common contractual protections a minority shareholder should consider?

Here are some common examples of protections a minority shareholder could seek:

  • Decision making: How will the minority shareholder be involved in decision making, how much of a say should they have, and on what kinds of decisions? Often there will be an agreed list of decisions that will not be taken without the consent of the shareholders.
  • Board representation: Does the minority shareholder have the right to be a director, or to appoint a director? There can be an agreement that board decisions will consider the minority shareholder’s viewpoint.
  • Enhanced rights to information: Shareholders who are not directors have few rights to information about the day-to-day operations of the company, so consider including the right to access financial reports and management accounts and other information in relation to the company’s performance
  • Fair Dividend policy: A clear policy on dividend payments can help reduce the risk of disputes between the shareholders. This is the opportunity for the parties to agree a level of working capital which must be retained in the business, to identify what level of profits should be reinvested and the level that should be distributed as dividends.
  • Tag along rights: These give minority shareholders the right to participate in in a share sale on no less favourable terms than the majority shareholders. 

  • Fair Value for shares: Where the shareholders’ agreement requires the minority to sell their shares (for instance if they leave the employment of the company), it is in the minority shareholders’ interest for this to be at a ‘Fair Value’. The agreement often includes a formula to calculate fair value when a minority shareholder decides to exit and their shares are bought out.

  • Anti-Dilution Rights: Restrictions on the issue of new shares, which could dilute the existing shareholders’ shareholding percentage and interests and the inclusion of pre-emption rights to subscribe for new shares. 
  • Dispute resolution and avoidance mechanisms: Shareholder disputes can be hugely distracting and can have a significant impact on the business. For this reason, it’s important to include provisions to identify how a dispute would be dealt with if it were to arise. This can include the appointment of a third party to help mediate the dispute. It can also be helpful to have a process to follow where the dispute cannot be resolved which might include the right for a party to buy another party out, particularly where there is a deadlock scenario.

How are these protections for minority shareholders recorded?

Every limited company has Articles of Association which, alongside company law, sets out how the company will operate and how decisions will be made by directors and shareholders.

It’s possible to include some of the protections mentioned above in Articles of Association – however, these Articles are a public document and for this reason shareholders often choose to keep arrangements confidential by including them in a shareholders’ agreement.

It’s important to ensure that any provisions made in the shareholders’ agreement don’t conflict with the Articles of Association. A legal specialist will be able to ensure this doesn’t happen, as well as making sure the shareholders agreement is well drafted supports the best interests of all shareholders.

The Thrings Corporate team supports businesses with legal matters at every stage of their growth, and specialises in the drafting of Articles of Association and shareholders’ agreements.


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