Our guide to shareholder rights
Shareholders, as owners of the company, have a right to share in its financial success. If a company is profitable, its directors may choose to reward shareholders by distributing a portion of these profits as dividends. This right to dividends is a key incentive for investing in a company, as it allows shareholders to reap the rewards of their investment alongside the potential for their shares to increase in value.
Shareholder rights are a cornerstone of corporate law, ensuring that those who invest in a company have a voice in its operations and are protected from potential abuses. These rights are not merely legal constructs; they are essential mechanisms that promote transparency, accountability, and fair treatment within the corporate structure. Shareholders, as the owners of a company, are entitled to a range of rights that enable them to participate in decision-making, share in the company’s profits, and hold the company’s directors accountable.
In the United Kingdom, shareholder rights are primarily governed by the Companies Act 2006, a comprehensive piece of legislation that outlines the duties and responsibilities of companies and their directors towards shareholders. In addition to the Companies Act, a company’s Articles of Association, which are the internal rules governing the company, and any Shareholder Agreements that may be in place, also play a significant role in defining and shaping shareholder rights. Understanding these rights is crucial for any investor, as it empowers them to make informed decisions and safeguard their investments.
Summary of shareholder rights
| Shareholder Right | Description |
| Right to Attend and Vote at General Meetings | Right to attend and participate in annual general meetings (AGMs) and extraordinary general meetings (EGMs), vote on company decisions, elect directors, approve major transactions, and amend company rules. |
| Right to Dividends | Right to receive a share of the company’s profits in the form of dividends, if declared by the board of directors. |
| Right to a Share of Company Assets Upon Liquidation | Right to receive a proportionate share of the company’s remaining assets after debts are paid, if the company is liquidated. This right is subordinate to the claims of creditors. |
| Right to Information | Right to access essential company documents, such as annual reports, financial statements, meeting minutes, and the register of members. |
| Pre-emption Rights | Right of first refusal to purchase new shares issued by the company, allowing existing shareholders to maintain their proportionate ownership stake and avoid dilution. |
| Protection Against Oppression | Right of minority shareholders to seek legal remedies if they are unfairly prejudiced by majority shareholders. This can include orders to stop oppressive conduct, buyouts, or even winding up the company. |
| Derivative Claims | Right of shareholders to sue on behalf of the company for wrongs committed against it, typically when directors have breached their duties or acted in a way that harms the company. |
Key Shareholder Rights
Right to Attend and Vote at General Meetings
Shareholders possess the fundamental right to attend and participate in a company’s general meetings. These meetings, which include the annual general meeting (AGM) and any extraordinary general meetings (EGMs), serve as crucial forums for shareholders to exercise their voice in company affairs. At these meetings, shareholders can vote on significant matters such as the election of directors, approval of major transactions (like mergers or acquisitions), and changes to the company’s Articles of Association. The right to vote is typically proportionate to the number of shares held by a shareholder, giving those with larger holdings a greater say in decision-making.
For shareholders who cannot attend general meetings in person, proxy voting allows them to appoint a representative to vote on their behalf. This ensures that all shareholders have the opportunity to participate in the decision-making process, regardless of their ability to be physically present.
Right to Dividends
Dividends are a distribution of a company’s profits to its shareholders. When a company generates profits, the board of directors may decide to allocate a portion of those profits as dividends to be paid out to shareholders. This right to dividends is a key incentive for investing in a company, as it allows shareholders to share in the company’s financial success.
It’s important to note that dividends are not guaranteed. The decision to declare and pay dividends rests with the company’s board of directors, and it depends on various factors such as the company’s financial performance, cash flow, and future investment needs. Shareholders, while entitled to dividends if declared, cannot compel the company to pay them. The company must have sufficient profits, after covering all expenses and obligations, to distribute dividends.
Right to a Share of Company Assets Upon Liquidation
In the unfortunate event that a company is liquidated (i.e., its operations are wound up and its assets are sold off), shareholders have a right to receive a share of the company’s remaining assets after all debts and liabilities have been paid. This right is often called the right to return of capital.
However, it’s crucial to understand that shareholders’ claims to assets in liquidation are subordinate to those of the company’s creditors. This means that creditors, such as lenders and suppliers, are paid first from the company’s assets, and shareholders are only entitled to what remains after all creditor claims have been satisfied.
Right to Information
Transparency is a cornerstone of good corporate governance. Shareholders have a right to access certain information about the company’s affairs. This typically includes the right to receive the company’s annual report and financial statements, which provide a comprehensive overview of the company’s financial performance and position. Additionally, shareholders may have the right to inspect other key documents such as the company’s register of members (which lists all shareholders) and minutes of general meetings.
The right to information is essential for shareholders to make informed decisions about their investments and to hold the company’s management accountable.
Pre-emption Rights
Pre-emption rights are designed to protect existing shareholders from dilution of their ownership stakes. When a company issues new shares, pre-emption rights give existing shareholders the first opportunity to purchase these shares in proportion to their existing shareholdings. This allows them to maintain their percentage ownership in the company and avoid having their stake diluted by the issuance of new shares to other investors.
Minority Shareholder Rights
While the rights discussed above apply to all shareholders, minority shareholders (those who hold less than 50% of the company’s shares) often require additional protections due to their potentially vulnerable position. Two key minority shareholder rights are:
Protection Against Oppression
Minority shareholders may sometimes face oppression by majority shareholders who use their control to unfairly prejudice the interests of the minority. This can manifest in various ways, such as excluding minority shareholders from decision-making, diverting company resources for personal gain, or unfairly diluting their shareholdings.
To protect against such oppression, minority shareholders in the UK have legal remedies available to them under the Companies Act 2006. These remedies include the ability to petition the court for relief, which can cause orders to stop the oppressive conduct, buy out the minority shareholder’s shares at a fair price, or even wind up the company if there is no other viable solution.
Derivative Claims
A derivative claim is a legal action brought by a shareholder on behalf of the company to remedy a wrong committed against the company. This type of claim is typically used when the company’s directors have breached their duties or acted in a way that harms the company.
Minority shareholders can play a crucial role in holding directors accountable through derivative claims. However, bringing a derivative claim is subject to certain conditions, and the court’s permission is required to proceed. If successful, a derivative claim can result in compensation for the company and deter future wrongdoing by directors.
Enforcement of Shareholder Rights
Shareholders have several avenues available to them to enforce their rights if they believe they have been violated. These avenues include:
Legal Avenues
- Court Actions: Shareholders can initiate legal proceedings to seek remedies for breaches of their rights. This may involve issuing legal proceedings against the company, its directors, or other shareholders. The court has the power to order various remedies, such as injunctions to prevent further breaches, damages to compensate for losses suffered, or even changes to the company’s articles of association.
- Alternative Dispute Resolution (ADR): In some cases, shareholder disputes can be resolved through ADR mechanisms such as mediation or arbitration. These processes are often faster, cheaper, and more confidential than traditional litigation.
Shareholder Activism
Shareholder activism refers to the actions taken by shareholders to influence a company’s decisions and practices. This can involve:
- Dialogue and Engagement: Shareholders can directly engage with the company’s management through meetings, letters, or other forms of communication to express their concerns and advocate for change.
- Shareholder Resolutions: Shareholders can submit resolutions to be voted on at general meetings. These resolutions can address various issues, such as corporate governance, environmental policies, or social responsibility.
- Voting Power: Shareholders can use their voting power at general meetings to elect directors who align with their views, reject proposals they disagree with, or even initiate a change in company leadership.
Shareholder activism can be a powerful tool for promoting corporate governance, accountability, and responsible business practices. It allows shareholders to actively participate in shaping the company’s future and ensuring that their interests are protected.
RLK Solicitors: Your Trusted Partner
RLK Solicitors understands the intricacies of shareholder rights and the importance of protecting investors’ interests. Our team of experienced commercial lawyers is dedicated to providing comprehensive legal services to shareholders facing a wide range of issues.
Our expertise includes:
- Advice and representation on all aspects of shareholder rights: We offer expert guidance on all aspects of shareholder rights, from understanding your rights under the Companies Act and the company’s Articles of Association to advising on complex shareholder disputes and transactions.
- Enforcement of shareholder rights: If your rights as a shareholder have been violated, we can help you explore your legal options and act to protect your interests. This may involve negotiating with the company, initiating legal proceedings, or pursuing Alternative Dispute Resolution mechanisms.
- Minority shareholder protection: We have extensive experience representing minority shareholders who are facing oppression or unfair treatment by majority shareholders. We can help you assert your rights and seek appropriate remedies.
- Equally, we act for companies in defending such actions being taken against them by shareholders.
- Shareholder agreements: We can assist with drafting, reviewing, and negotiating shareholder agreements to ensure that your rights are clearly defined and protected.
At RLK Solicitors, we pride ourselves on our client-focused approach. We understand that every shareholder’s situation is unique, and we tailor our services to meet your specific needs. We strive to provide clear, practical advice and effective representation to help you achieve your goals. Contact us today to discuss your unique position.
** This article does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to provide information on issues that may be of interest. Specialist legal advice should always be sought in any particular case **
Chris Guy is the Head of the Business Interruption Litigation department and has recently been made a Director. Chris is primarily from an insurance based civil litigation background, having trained at Legal 500 firm Berrymans Lace Mawer (now Clyde & Co).
Chris has an astute commercial mindset, having worked within the legal team at a major insurer and was previously seconded to assist in-house with FTSE 250 companies and international insurers. Chris was listed in the Legal 500 for his civil litigation expertise. Chris assists clients with his attention to detail, commitment and user-friendly service.
