Minority shareholders are shareholders who hold less than 50% of the shares in the company. In small or medium-sized companies, minority shareholders enjoy certain rights and protections by the law, but sometimes these are not enough. In order to protect their rights, minority shareholders should take action before issues occur. One of the best ways to do this is to establish the duties and obligations of each party involved in a Shareholders’ Agreement right from the start.
Here, we take a look at why this kind of agreement is beneficial, what a shareholders’ agreement contains, and the importance of having it reviewed by legal professionals.
Why have a Shareholders’ Agreement?
With a Shareholders’ contract in place, minority shareholders could avoid disputes and disagreements where directors of majority shareholders have abused their power of position.
Articles of Association may not offer full protection in such situations, and they are available for everyone to see. Whereas a Shareholders’ Agreement is private and can only be seen by the shareholders. As a minority shareholder, you are in a vulnerable position, whichever way you look at it. For your best interest, you’ll need a Shareholders’ Agreement.
We have worked with clients in the past who wanted to resolve issues such as:
- reviewing Shareholders’ Agreements to increase their protection
- reviewing Investment Agreements
- resolving minority shareholder disputes
- and preventing the abuse of power by majority shareholders and directors.
Here are some of the provisions minority shareholders should consider adding to the Shareholders’ Agreement to enhance their protection.
Anti-dilution provisions
Most companies don’t have protection against dilution, which is why minority shareholders should push for this provision in the Shareholders’ Agreement. Dilution protection helps prevent the minority shareholder’s ownership from decreasing when new shares are issued.
Rights to access financial information
The Companies Act 2006 doesn’t cover sharing financial information with minority shareholders. Hence, minority shareholders should ensure adding this clause to the agreement. Controlling shareholders and directors typically don’t disclose financial statements and management with the minority shareholders voluntarily, and this provision will ensure they do.
Power of Veto
With this provision, minority shareholders can block certain decisions unless all shareholders agree to them. These decisions could include:
- business sales and mergers
- further issue of share capital
- modifying the company’s articles of association
- or substantial investment
Control the transfer of shares
A Shareholders’ Agreement can control how all shareholders deal with their shares, such as:
- Share transfers require the majority or unanimous consent of shareholders
- Pre-emption rights – an existing shareholder holds the right of first refusal on any shares that are offered by a company or transferred from another shareholder
- Family ownership provisions – shares can not be transferred to non-family members without first applying pre-emption rights
Conclusion
There’s no legal obligation to have a Shareholders’ Agreement, it’s recommended for companies that have more than one shareholder. This legal document will protect the interests and needs of your business if it’s done right. This is why it’s even more important to get it reviewed by a legal professional to ensure it sufficiently protects you. If you think you could benefit from this type of agreement, please do not hesitate to get in touch.
Investing money and effort into putting together a well-drafted, clear and concise Shareholders’ Agreement keeps your business protected in the long term.