Shareholders' rights in private and public companies in the UK (England and Wales): overview
A Q&A guide to shareholders' rights in private and public companies law in the UK (England and Wales).
The Q&A gives an overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.
Types of limited companies and shares
Limited companies in the UK can be private or public. For public companies, the liability of members is limited by shares, and for private companies, liability can be limited by shares or by guarantee.
A company limited by shares has separate legal personality from that of its owners (shareholders). The liability of a shareholder for the company's liabilities is generally limited to the amount, if any, that remains unpaid on that shareholder's shares. A company limited by shares must have an issued share capital comprising at least one share. The Companies Act 2006 (CA 2006) contains rules on a company's share capital.
Companies limited by guarantee are normally incorporated for non-profit making functions. Although they share some of the same characteristics as a private company limited by shares, they are formed without share capital. Members are liable, to the extent of their guarantees (that is, the amount they undertake to contribute to the assets of the company, usually a nominal sum), only if the company is wound up and a contribution is needed to enable its debts to be paid.
Both companies limited by shares and companies limited by guarantee must have constitutional documents (articles of association), which govern the management and administrative structure of the company. The CA 2006 prescribes a different set of model articles for each of these two types of company.
The characteristics of a public limited company differ from a private company limited by shares in certain ways, for example, there is a minimum issued share capital requirement (see Question 2).
The most commonly used company is a company limited by shares. Foreign investors most commonly use private companies limited by shares, unless a public company is specifically required.
The main type of share typically issued by a company is an ordinary share. Share rights are set out in the company's constitution (articles of association) and usually entitle shareholders to:
Payment on the winding-up of the company.
Participation in meetings of the company.
Companies can also issue preference shares that typically give the holder preferential rights regarding entitlement to dividends and on a winding-up, but limited voting rights.
Shares can be redeemable or non-redeemable. They can also be convertible (into other classes of shares) or deferred (that is, they do not provide rights to dividends either for a set period or until certain conditions are met).
Companies can also issue instruments giving rights to subscribe to, or convert into, shares, such as:
Unsecured loan stock.
Until converted, these instruments do not form part of the company's capital.
General shareholders' rights
Shareholders usually have the same basic rights regardless of whether the company is private or public. The rights of shareholders depend on the rights attaching to their shares under the company's articles of association. Different shareholders can enjoy different rights and this is usually effected by a company having different classes of shares. Such rights are usually provided in the company's articles of association. There is no limit on the number of different classes of shares a company can have.
Shareholders' rights can include special rights, including:
Rights relating to the appointment of directors.
A right to be consulted or informed before the company takes a particular action.
Weighted voting rights.
The rights of shareholders can be limited, modified or waived. However, shareholders cannot be financially liable for more than the amount unpaid on their shares. Shareholders can agree with the company and/or between themselves that their rights are restricted. For example, a share may be non-voting (that is, the holder cannot vote at a meeting of the company) or may not entitle the holder to payment of a dividend. The articles of association of the company may entrench certain rights so that, for example, a set percentage of the shareholders must vote in favour of varying a right. Entrenched provisions in a company's articles of association can be amended by agreement of all the company's shareholders.
If a company has more than one class of shares, the articles of association often contain a provision to the effect that the rights of that class cannot be varied by changing the rights of another class without the consent of the holders of the first class of shares.
Variations of rights are usually provided in the company's articles of association, although they can be included in a shareholders' agreement if the variation only applies between two or more shareholders.
Minority shareholders' rights vary depending on the percentage of shares/voting rights they hold in the company, as follows:
At least 5%: right to:
apply to court to prevent the conversion of a public company into a private company;
call a general meeting;
require the circulation of a written resolution to shareholders (in private companies); and
require the passing of a resolution at an annual general meeting (AGM) of a public company.
At least 10%: right to call for a poll vote on a resolution.
More than 10%: right to prevent a meeting being held on short notice (in private companies).
15%: right to apply to the court to cancel a variation of class rights, provided such shareholders did not consent to, or vote in favour of, the variation.
More than 25%: right to prevent the passing of a special resolution.
For listed public companies, institutional investors (such as pension funds and insurance companies) can be influential. Groups representing such investors can also be influential, including the:
Investment Association (which has taken over responsibility for guidelines previously issued by the Association of British Insurers).
Pensions Investment Research Consultants (PIRC).
National Association of Pension Funds (NAPF).
Each of these bodies has issued its own set of guidelines and, in some cases, voting recommendations. The guidelines cover matters such as corporate governance and executive remuneration. These groups monitor corporate governance compliance, especially in relation to AGMs, and provide voting guidelines regarding resolutions at company meetings.
These bodies may issue warnings to the company. For example, a "red top" alert indicates a company's non-compliance with the relevant body's principles and/or corporate governance best practice.
General meeting of shareholders
Calling a general meeting
Requirement to hold an annual general meeting (AGM)
Public companies must hold an AGM in each period of six months beginning with the day following their accounting reference date. Private companies do not need to hold an AGM, although they can choose to do so.
Issues to be approved at an AGM
The AGM typically deals with matters such as:
Approving the company's report and accounts.
Approving the directors' remuneration report and remuneration policy (if applicable) (see Question 22).
Approving the company's final dividend.
Appointing or re-appointing the company's auditors.
Electing or re-electing the company's directors.
Approving amendments to the company's articles of association.
Granting authority for the directors to allot new shares.
Disapplying pre-emption rights.
Buying back the company's own shares.
Approving the making of political donations.
Issues to be approved by shareholders in a general meeting
The only decisions that must be approved in a meeting (rather than through a written resolution) include the:
Removal of directors.
Removal of auditors.
Listed companies must obtain further shareholder approvals at general meetings for certain transactions. Examples include:
"Related party transaction", that is, a transaction (other than a transaction in the ordinary course of business) between the company and a director, a substantial shareholder (a shareholder exercising or controlling the exercise of 10% or more of the voting rights at all general meetings) or a "person exercising significant influence" or an associate of any of them.
"Class 1" transactions, that is, transactions in which one of the percentage ratios (gross assets, profits, consideration, gross capital) exceed 25%.
For more information on actions that require shareholder approvals/resolutions, see Question 12.
A general meeting can be held by telecommunication means, unless this is specifically prohibited under the company's articles of association. It is important that persons attending the meeting can hear other persons taking part.
Private companies can pass resolutions in writing to avoid the need for a physical meeting (written resolution). In such a case, the resolution is sent to all shareholders who are entitled to vote on the resolution. Shareholders indicate their agreement by signing and returning it to the company. This usually only works in the case of small private companies with relatively few shareholders.
For notices the notice period and the content of the notice must be considered.
Notice periods. The notice period for meetings of a private company must be at least 14 days (although the articles of association may specify a longer period). However, members holding at least 90% (or a higher percentage specified in the company's articles) of the company's shares can consent to holding a meeting at a shorter notice.
For public companies, notice requirements are as follows (unless the company's articles provide for a longer notice period):
21 days for AGMs.
14 days for other general meetings.
For traded companies (that is, companies whose securities are traded on a regulated market (that is, the Main Market of the London Stock Exchange in the UK), the following conditions must also be met before a meeting can be held on a 14 days' notice:
A special resolution must be passed (this is usually done at the company's AGM).
The company must offer the possibility to vote by electronic means. This means that it must be possible to appoint a proxy through a website.
The UK Corporate Governance Code also states that the notice should be at least 20 working days for AGMs and 14 working days for other general meetings.
The threshold for consent to short notice of a general meeting of a public company is 95% (or a higher percentage specified in the company's articles) but this is rarely used due to the nature of the shareholder base of most public companies.
These periods of notice are "clear" days (that is, they do not include the day of sending the notice and the day of the meeting).
Content of the notice. All shareholders are entitled to receive notice of a general meeting. The notice must state the general nature of the business to be dealt with at the meeting. In practice, notices usually set out the actual resolutions to be approved at the meeting and may include an explanation of the resolution. Listed companies provide detailed explanations of the resolutions. In addition to sending the notice, listed companies must publish prescribed information (in relation to their share capital, voting rights) on their website in advance of the general meeting and the information must remain on their website for two years. Notices of listed company AGMs tend to follow a particular format and there are various notes to the notice that must be included, for example in relation to uncertificated securities, members' rights and persons nominated by a member to enjoy information rights.
Unless the company's articles of association provide otherwise, the quorum for a general meeting is two (unless the two persons are acting as proxy or corporate representative of the same member). For a sole member company, the quorum is one.
There are no quorum or notice requirements for passing a written resolution (a procedure that is available for private companies only). Provided that the resolution has been circulated to all eligible members, it will be passed when the requisite majority is reached (see Question 11).
The voting requirements for passing resolutions at general meetings are as follows:
50% (a simple majority) of those attending and voting (in person or by proxy) for ordinary resolutions.
75% of those attending and voting for special resolutions.
A company's articles usually provide that each resolution put to the vote at a general meeting will be decided by a show of hands unless a poll is duly demanded. The articles will set out who is entitled to call a poll. On a show of hands, the default position under the Companies Act 2006 is that every shareholder present in person has one vote, regardless of the number of ordinary shares held. On a poll, each shareholder has one vote for each share held. The default position can be varied by a company's articles.
A written resolution can be passed as an ordinary or special resolution. The percentages above relate to the total voting rights of all shareholders who are entitled to vote when the resolution is circulated.
A shareholder can appoint one or more persons to act as his proxy. If he appoints multiple proxies, they must be appointed in relation to different shares.
It is possible for articles of association to provide for weighted voting rights (for example to attach additional votes to certain shares on certain occasions). It is also possible for shareholders to agree to aggregate their shares to exercise their voting rights in a particular way (for example, to vote for or against a particular resolution). This would be more likely to happen in the case of a contentious resolution.
Under the Companies Act 2006, shareholder approvals/resolutions are required for certain corporate actions. Unless otherwise stated, such resolutions are ordinary resolutions (that is, they must be approved by a simple majority of shareholders).
Corporate actions that require an ordinary resolution include:
Approving the payment of a political donation.
Approving a loan to, or a substantial property transaction involving a director.
Approving a payment for loss of office to a director.
Removing an auditor from office.
Approving a liability limitation agreement between an auditor and the company.
Corporate actions that require a special resolution include:
Amending the company's articles of association.
Changing the company's name.
Approving a reduction of capital or share buy-back out of capital.
Disapplying pre-emption rights.
Re-registration of a private company as public (and vice versa).
These resolutions can be approved in a general meeting or by way of written resolution (for a private company).
Shareholder rights relating to general meetings
Shareholders of a public company can require the company to circulate a resolution to be voted on at the company's AGM where such a request is made by either:
Shareholders representing at least 5% of the total voting rights of all shareholders who have a right to vote on the resolution at that AGM.
100 shareholders who have a right to vote on the resolution at that meeting and hold shares that have been paid up an average of at least GB£100 per shareholder.
Shareholders of either a private or public company can also require the company to circulate to other shareholders a statement of not more than 1,000 words on a matter referred to in a proposed resolution (or other matter) to be dealt with at the meeting. The required levels of shareholding for making such a request are the same as above. Shareholders who require further information must engage directly with the company.
In large listed public companies, corporate governance guidelines encourage companies to engage with their shareholders, particularly in relation to any potentially contentious resolutions. However, price-sensitive information should not be released on a selective basis.
Shareholders will receive notice of the meeting, which sets out the meeting's agenda. For a public listed company, the notice will be detailed and will include explanations of the proposed resolutions. There may also be a separate circular providing further information. In some cases, shareholders will also receive a copy (or description) of the documents to which the resolutions relate, for example the company's annual accounts or a director's long-term service contract. As a result, shareholders are unlikely to require further details.
See Question 14.
Any shareholder can challenge the decisions adopted by a general meeting on procedural grounds (for example, for failure to give proper notice of the meeting or inquorate meeting). However, depending on the circumstances, such decisions may still be enforceable. For example, intentional failure to give notice will invalidate the decisions made at the meeting, but it is likely that accidental failure will not invalidate such decisions.
A shareholder who attended and voted at a meeting cannot claim that a resolution has not been passed when no such objection was raised at the meeting.
If a decision is thought to be unfairly prejudicial to minority shareholders, a shareholder may bring an "unfair prejudice" claim. There is no minimum shareholding level for bringing such an action. No limitation period applies to a petition for the relief of unfairly prejudicial conduct. However, the court has discretion on whether to grant relief.
Shareholders of a quoted company can require an independent assessor to report on any poll taken or to be taken at a general meeting. The request must be made by either:
Shareholders representing not less than 5% of the total voting rights of all shareholders who have a right to vote on the matter to which the poll relates.
Not less than 100 members who have a right to vote on the matter and hold shares in the company that have been paid up an average of at least GB£100 per shareholder.
The independent assessor's report must cover whether:
The procedures adopted in relation to the poll were adequate.
The votes cast were fairly and accurately reported and counted.
The validity of any proxy appointments was fairly assessed.
The notice of the meeting complied with the relevant provisions of the Companies Act 2006 (CA 2006).
Where the meeting suffered some form of procedural irregularity, a shareholder will usually raise this issue with the board of the company. If the board refuses to co-operate, the shareholder can seek an order from the court to prevent the company relying on the decisions made at the meeting. If the meeting has not taken place, a shareholder can ask the company to postpone the meeting or seek a remedy (such as an injunction) to prevent the meeting from taking place.
There is no specific statutory time limit to challenge a general meeting resolution, although the length of time between the date of the meeting and the challenge may have an impact on the remedies available. However, there are time limits for actions taken in relation to specific resolutions. For example an application to cancel a resolution approving a payment out of capital for the redemption or purchase of the company's shares must be made within five weeks after the resolution is passed (CA 2006).
Shareholders' rights against directors
A company's articles of association usually contain provisions relating to the appointment of a director and the termination of such appointment. The standard model articles that apply to private and public companies by default under the Companies Act 2006 (that is, if the company does not adopt its own articles of association or, if it does adopt articles, to the extent that these do not exclude or modify the relevant model articles) provide that a director can be appointed through either:
An ordinary resolution (that is, with the approval of 50% of the shareholders).
A decision of the board of directors.
The appointment of a director can be terminated in various ways. For example, a director will be automatically removed from office if:
He is prohibited by law from being a director.
A bankruptcy order is made against him.
A director can also resign in accordance with the provisions of the articles of association. A director of a public company is normally required, under the corporate governance requirements and articles of association, to retire by rotation every three years. Such a director can then be re-appointed by ordinary resolution of shareholders. A director can also be removed from office if the shareholders pass an ordinary resolution (Companies Act 2006).
There is no formal procedure for shareholders to challenge a resolution passed by the board of directors. However, shareholders holding 75% or more of the voting rights of the company can direct the board to take certain actions such as appointing or removing a director. The shareholders can require the directors to call a general meeting and will then be able to pass a resolution.
Shareholders who are not satisfied with a decision of the board, or are aware that the required procedures or legal requirements were not followed (for example, the declaration of a director's interest in the matter under discussion was not declared), should raise the issue with the chairman or other appropriate board member (such as the senior independent director in a listed company).
Directors have a statutory duty to (Companies Act 2006):
Act in accordance with the company's constitution and use the directors' powers only for the purposes for which they were conferred.
Promote the success of the company for the benefit of its members, taking into account various factors.
Exercise independent judgement.
Exercise reasonable care, skill and diligence.
Avoid conflicts of interest.
Not accept benefits from third parties.
Declare their interest in transactions involving the company.
Directors' liability is a very complex area of English law. Generally, shareholders can bring an action against the directors in certain circumstances, as follows:
Shareholders can, subject to obtaining court approval, bring a derivative claim on behalf of the company against the directors for negligence, default, breach of duty or breach of trust.
Minority shareholders can bring an "unfair prejudice" claim seeking relief against the acts of the controlling directors of the company. Alternatively, the shareholders may, on grounds of oppression, seek the winding-up of the company on a just and equitable basis.
Where the shareholder has a personal cause of action against the director (for example, as a result of a direct contract between the director and shareholder).
Where, in exceptional circumstances, the director has breached the company's constitution and the action is incapable of ratification by the shareholders. In such cases, the shareholder can seek to enforce the relevant constitutional provision.
Directors may also be liable to creditors in insolvency situations.
The liability of directors cannot be limited or excluded. Any provision that purports to exempt a director from liability for negligence, default, breach of duty or breach of trust in relation to the company is void (Companies Act 2006). In practice, when a claim is brought against a director for any wrongdoing, the director can either seek indemnification from the company or from the company's directors' and officers' (D&O) liability insurance policy.
Conflicts of interest
Directors' duties include the duty to avoid situations in which a director has, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company (situational conflicts) (Companies Act 2006). Such situations can be authorised by the board of directors (provided, in the case of a public company, that its constitution permits such authorisation). The authorisation is effective provided that any quorum requirements for the meeting are met without counting any interested directors, and their votes are not counted.
In addition, directors must declare the nature and extent of conflicts of interest arising out of a proposed transaction or arrangement with the company (transactional conflicts). The declaration can be made at a board meeting or by written notice to the directors, and must be made before the company enters into the transaction or arrangement. The declaration must be updated if the interest changes. There are exceptions to this rule, including where:
The interest cannot reasonably be regarded as giving rise to a conflict.
The transaction concerns the terms of a director's service contract that has been or is to be considered by the directors.
A company's articles of association often contain provisions that allow the relevant director to take part in and vote on the matter giving rise to the conflict (subject to declaration of the conflict).
Transactions with directors
Loans to directors must be approved by an ordinary resolution (that is, simple majority) of the shareholders. The nature of the transaction, the amount and purpose of the loan and the extent of the company's liability under any transaction connected with the loan must be disclosed to shareholders. Shareholder approval is also required where a company is proposing to give a guarantee or provide security in connection with a loan made by any person to such a director. Where the director of the company is also a director of the company's holding company, the members of that holding company must also approve the transaction.
There are also restrictions on "substantial property transactions". These are arrangements under which a company will acquire non-cash assets (assets with a value that exceeds 10% of the company's asset value and is more than GB£5,000, or that exceeds GB£100,000) from, or transfer such assets to, a director (or a person connected with a director) of the company or its holding company. A company and the relevant director or connected person cannot enter into a substantial property transaction unless either the arrangement has been approved in advance by a shareholder resolution or is conditional on such approval being obtained.
Shareholder approval is also required for directors' service contracts with a guaranteed term of employment that is, or may be, longer than two years. A memorandum setting out the proposed contract must be made available to members. (See also Question 21.)
In all these cases, no shareholder approval is required for a wholly-owned subsidiary or for a non UK-registered company.
Shareholders' rights of action
The UK Corporate Governance Code provides that at least half of the board (excluding the chairman) of listed companies on the FTSE 350 (an index containing the largest 350 companies by market capitalisation which are traded on the London Stock Exchange) should be composed of independent non-executive directors. A smaller listed company should have at least two independent non-executive directors.
A company must keep available for inspection a copy of any director's service contract with the company or a subsidiary (Companies Act 2006).
Where a shareholders' resolution concerns a director's service contract for a period of two years or more, the contract (or a memorandum setting out the proposed contact) must be available at the company's registered office for not less than 15 days ending with the date of the relevant meeting, and during the meeting (see also Question 18). A listed company should also make available for inspection at an AGM the terms of appointment for its non-executive directors.
For quoted companies (that is, companies with shares listed on the Official List), a simple majority of shareholders must approve the directors' remuneration policy (that is, a policy that sets out the company's future policy on directors' remuneration) at least every three years. Shareholders also have an annual non-binding vote on the directors' annual remuneration report (that is, an implementation report that discloses how the remuneration policy was implemented in the previous financial year). The remuneration report must be sent to shareholders, published on the company's website and filed at Companies House.
Shareholders' rights against the company's auditors
Private companies. The initial auditors of a private company can be appointed by either the company's:
Shareholders, by way of ordinary resolution (either in a meeting or a through a written resolution).
If the auditors are appointed by directors (to fill a vacancy or as a first appointment), the appointment must be confirmed by a simple majority of the shareholders within either:
28 days after the accounts for the previous year have been sent out to shareholders.
28 days after the end of the period allowed for sending out the accounts to shareholders for the previous financial year.
An audit firm appointed by the shareholders will remain in office until the shareholders give notice to the company that they wish to end the appointment. The notice must be given before the end of the accounting reference period immediately before renewal would take effect, and must be given by shareholders holding at least 5% of the total voting rights (or a lower percentage specified by the company's articles).
Public companies. The auditors of a public company can be appointed by either the company's:
Shareholders by way of ordinary resolution.
Public companies tend to appoint or re-appoint their auditors at their AGM.
The Corporate Governance Code provides that FTSE 350 companies should put out the external audit contract to tender at least every ten years. For listed companies, an audit committee will be the interface between the auditor and the board of directors
Shareholders can remove an auditor at any time by ordinary resolution in a general meeting. A special notice of 28 days must be given. It is one of the few decisions that cannot be taken by way of a written resolution (for private companies) (see Question 8, Issues to be approved by shareholders in a general meeting).
There are additional notifications requirements on both companies and their auditors on termination of an appointment. For example, notifications to an "appropriate audit authority" may be required in certain circumstances
To act as a company's auditor, a firm or individual must be (Companies Act 2006):
A member of a recognised supervisory body.
Eligible for appointment under the rules of that body.
Independent from the company to which the appointment relates.
It is a criminal offence for a person to knowingly or recklessly cause the auditors' report on the company's annual accounts to include any matter that is materially misleading, false or deceptive. Some offences also relate to omitting a statement that must be included in the report.
An auditor may also incur civil liability for:
Negligence in discharging their duties.
Negligent misstatement if a third party has suffered loss or damage in relying on the auditors' report.
Breach of contract under the auditors' terms of engagement with the company.
Auditors can negotiate a liability limitation agreement with the company (LLA) which limits the amount owed to the company for negligence.
Disclosure of information to shareholders
Directors of Official List and AIM companies must notify the company in writing of all dealings in relation to the shares they hold in the company (Disclosure Rules and Transparency Rules). The company must then notify such dealings to the market. This also applies to share pledges (see Question 33). This disclosure requirement applies to all "persons discharging managerial responsibilities", which include senior managers and directors.
Listed companies are also under an obligation to disclose to the market as soon as possible any "inside information", which is defined as information that is precise, not generally available and relates either to the shares or the issuer of the shares and would, if it were public, have a significant effect on the price of the company's shares.
A similar obligation is imposed on AIM companies. They must announce to the market any new developments that are not public knowledge and that, if made public, would be likely to lead to a significant movement in the price of the company's securities. The AIM Rules provide a few examples: matters concerning a change in the company's financial condition; its sphere of activity; the performance of its business or its expectation of its performance.
Listed public companies must comply with the UK Corporate Governance Code. This applies to all companies with securities listed on the premium segment of the Official List whether these are incorporated in the UK or not. The most recent edition of the Code was adopted in 2014 and applies in relation to financial years beginning on or after 1 October 2014.
Under the Listing Rules, companies must provide in their annual accounts an explanation of how they have complied with the Code or an explanation of non-compliance. As a matter of best practice, an AIM company may also wish to comply with the Corporate Governance Code, so far as practicable for a company of its size. The Quoted Companies Alliance has published a Corporate Governance Code for Small and Mid-sized Quoted Companies, which may be more appropriate for AIM companies and smaller quoted companies.
Unless shareholders have a separate agreement with the company, they have no special entitlement to information (other than information already in the public domain) about the company's business or any specific transactions, regardless of how many shares they hold. Listed companies may require shareholder approval for larger or significant transactions and may therefore have to send a circular to shareholders about the transaction, and call a meeting to obtain their consent.
Every company must keep records of minutes of all proceedings of general meetings (including resolutions passed at those meetings) and copies of all shareholders' written resolutions. Such records must be kept available for inspection by any shareholder free of charge.
Any person (whether or not a shareholder of the company) is entitled, on payment of the prescribed fees, to inspect a company's register of members and index of members, and to be provided with a copy of the register (or any part of it). However, these rights are subject to that person submitting a request containing certain prescribed information, including the purpose for which the information is to be used and whether the information will be disclosed to any other person. Where a company receives such a request, it can either allow inspection and/or provide a copy of the register, or, if it believes that the request is not made for a proper purpose, it can refer the request to the court. There is ICSA guidance and case law on the meaning of "proper purpose".
Shareholders' agreements may contain almost any arrangements and normally cover matters that the shareholders prefer not to be made public (as articles of association are publicly available). Shareholders' agreements often cover voting undertakings or voting restrictions that would otherwise require the creation of different classes of shares carrying special voting rights. For private companies, shareholders' agreements may also entitle the shareholder(s) to receive information about the company which is not available to other shareholders.
The general rule under English law is that only the parties to an agreement can sue or be sued under that agreement. However, there are a number of exceptions to this rule, the most important is the Contract (Rights of Third Parties) Act 1999 under which a third party may enforce a contract term against the parties to the agreement where the contract expressly gives the third party the right to do so or the term purports to confer a benefit on the third party, and the contract shows the parties' intention to make that term enforceable by the third party. In these circumstances, provisions of a shareholders' agreement could be enforceable against third parties.
Shareholders' agreements will often include provisions that require new shareholders to execute a deed of adherence to ensure that the new third party shareholder is bound by the terms of the shareholders' agreement.
An agreement that has been agreed by all the shareholders (or a class of shareholders) and which would not otherwise have been effective for its purpose unless passed by a special resolution (or a particular majority of the relevant class) must be registered with the Registrar of Companies, and will then be available for public inspection. Therefore, an agreement must be registered to the extent that it overrides or contradicts the provisions of the company's articles of association.
Shareholders' agreements need not be registered or disclosed to the public if they only supplement the company's articles or deal with an unrelated matter.
There are two key types of dividend: final dividends and interim dividends. As the name suggests, final dividends are paid once a year and are calculated after the company's annual accounts are drawn up. Typically, final dividends are declared by shareholders (in the case of a public company, normally at the company's annual general meeting) following a recommendation from the board of directors. The dividend declared must not exceed the amount recommended by the directors.
By contrast, interim dividends can be paid at any time throughout the year and are calculated before the company's annual earnings are determined. Typically they are decided solely by the board, without shareholder approval, and can be paid if the directors are satisfied that this is justified having regard to company's profits and future financial requirements and are distributed either quarterly or after the first six months of the company's financial year. An interim dividend is due only when it is actually paid by the company, whereas a final dividend is due when it is approved by the general meeting and it then becomes a debt immediately due from the company.
Articles of association can provide that certain shares carry no, or very limited, rights to dividends. The articles also typically state that dividends do not carry interest against the company unless otherwise provided by the rights attached to the shares. This is also the position if the articles are silent on this point.
A company can only pay dividends out of "profits available for distribution", commonly referred to as distributable profits. These are defined as the company's accumulated realised profits (not previously distributed or capitalised) less its accumulated realised losses (not previously written off in a reduction or reorganisation of capital). Realised profits and losses are determined in accordance with technical guidance produced by the Institute of Chartered Accountants in England and Wales.
Dividends may only be paid in cash, unless the articles authorise the payment in the form of the issue of shares or debentures or the distribution among the members of assets in specie. Modern articles generally provide express authority (with the sanction of an ordinary resolution) for dividends to be paid in specie.
Financing and share interests
Public companies are prohibited from giving financial assistance, directly or indirectly, for the purpose of the acquisition of their shares. This prohibition is wide and covers the giving of loans, guarantees and security and other financial assistance that materially reduces the company's net assets, or where the company has no net assets. The prohibition also applies to financial assistance given by a public company for the purpose of the acquisition of shares in its private holding company.
Private companies are no longer subject to restrictions on financial assistance, although a private company cannot give financial assistance for the purchase of shares in its public holding company. However, private companies must still comply with the general rules and restrictions on reduction of capital.
Share transfers and exit
Shares are freely transferable, unless the company's articles of association provide otherwise. Shares of listed companies must be freely transferable, unless the Financial Conduct Authority (FCA) agrees to restrictions on transfer (in exceptional circumstances). A restriction on the transfer of such shares is generally permitted where the shareholder or a person interested in the shares has failed to respond to a notice requiring it to disclose the nature and extent of his interests. This restriction is normally included in the company's articles of association. Companies quoted on AIM may also restrict transfers of shares where they wish to limit the number of shareholders in a particular country, to ensure that they do not become subject to foreign statutes or regulations.
Private companies can impose restrictions on the transfer of shares. Such restrictions often provide that shares must be offered to existing shareholders before being transferred to third parties. A private company's articles of association can also provide that the directors can refuse to register the transfer of shares to persons that they do not approve. In addition, the articles of association may set out pre-emption rights.
On an issue of new shares, statutory pre-emption rights will generally apply unless they are disapplied either in the company's articles or by a shareholder's resolution (a special resolution requiring a 75% majority). There are some exemptions to the statutory pre-emption rights, for example they will not apply where the consideration (or part of the consideration) is non-cash, or where there is an allotment of bonus shares. In the case of public listed companies, pre-emption rights are generally disapplied at the annual general meeting. There are institutional shareholder guidelines as to the amounts that may be the subject of a resolution for disapplication of pre-emption rights. The Pre-emption Group's Statement of Principles in relation to the disapplication of pre-emption rights state that companies can seek authority to issue non pre-emptively for cash up to 5% of their issued share capital and an additional 5% in connection with a specified acquisition or capital investment.
Except where a special resolution is required to disapply pre-emption rights (see Question 35), minority shareholders have no rights to restrict changes to the company's capital structure. This is subject to the general right of a minority shareholder to apply to the courts if the company's affairs are being conducted in a manner that is unfairly prejudicial to all or some of the shareholders.
Issues of shares may be limited through:
A shareholders' agreement.
Special share rights giving minority shareholders a veto over changes to the company's share capital structure.
Under the Financial Conduct Authority's (FCA's) Disclosure Rules and Transparency Rules, the shareholders of both Official List and AIM companies must inform the company when their voting rights reach, exceed or fall below 3%, or any whole percentage figure above 3% (that is, 4%, 5%, and so on). These rules also apply to AIM companies incorporated in the UK. The company must then notify the FCA of the change and announce the changes to the market.
AIM companies must also include (and keep up-to-date) on their website details of any shareholders holding 3% or more of the company's voting rights.
The general rule is that a company cannot acquire its own shares, although there are a number of exceptions under the Companies Act 2006. In particular, the Act sets out procedures and conditions that must be satisfied for a share buy-back to be permitted, which include shareholder approval. A public company can only use distributable profits or the proceeds of a fresh issue of shares to pay for the buy-back. A private company can finance the purchase out of capital, subject to a number of conditions, including:
Statements by the directors and auditors regarding the company's financial position and prospects.
Shareholders can normally only exit from the company through selling their shares to a third party. In private companies, articles of association may give shareholders a right to require other shareholders to buy their shares in certain circumstances, or require them to transfer their shares if, for example, they leave their employment with the company. The articles may pre-determine the price of the shares or provide that, if the parties cannot agree, the shares will be valued by an independent third-party valuer. It is possible for the shares to be bought back by the company, subject to shareholder approval, although this is not very common (see Question 38).
Material transactions carried out by a listed company require the prior approval of shareholders. Material transactions are classified by "class tests" set out in the Listing Rules (see below). For example, a "class 1" transaction is one that any of the percentage ratios in the class tests is 25% or more. In such a case, the company must seek shareholder approval and send an explanatory circular to shareholders.
For an AIM company, no shareholder approval is required for substantial transactions or related party transactions but such transactions must be announced to the market.
In the case of a reverse takeover (that is, where a listed company acquires a business, an unlisted company or assets where any one of the percentage ratios under the Listing Rules/AIM Rules is 100% or more or that would result in a fundamental change in the business or a change in the board or voting control of the listed company), shareholder approval is required for both Official List and AIM companies. The "class tests" measure the size of the listed company as against the size of the company that it is proposing to acquire, by reference to different factors: the gross assets test; the profits test; the consideration test; and the gross capital test. For AIM companies, it also includes the turnover test.
No such approval is required for private companies.
The shareholders have no direct right to the proceeds of a sale of the company's assets. Such proceeds may be distributed by way of dividends to the extent that they represent distributable profits. They may otherwise be returned to shareholders through a reduction of capital or on a winding-up.
In the case of a merger involving the disposal of shares, all shareholders must be treated equally, so that any consideration received must be divided between them in proportion to their shareholdings.
A public company requires a special resolution (a majority of 75% or more) to re-register as a private company. The same is true for a private company reregistering as a public company. A special resolution will also be required to make any changes to the articles of association as a consequence of the re-registration.
A public company can be converted into an SE with the approval of at least 75% of the shareholders voting. SEs are not common in the UK.
On liquidation of a company, the liquidator collects in and realises the assets of the company. The liquidator must pay creditors in the following statutory order of priority:
Expenses of the winding-up.
Ordinary unsecured creditors (pro rata).
After the above creditors have been paid, any surplus will be distributed to the shareholders of the company in accordance with their shareholdings. Preference shareholders may have a preferential right to the surplus ahead of ordinary shareholders.
Under the Insolvency Act 1986, shareholders can adopt a special resolution (requiring a 75% majority of those voting) for a voluntary winding-up. The shareholders will appoint a liquidator for the purposes of winding up the company and distributing its assets. If the collection and distribution of assets takes more than one year, the liquidator must call a general meeting at the end of the first year and each successive year to keep the shareholders informed. A final meeting of the shareholders is held before the dissolution. Usually, a practical difficulty is the inability to obtain the majority required for a special resolution.
Alternatively, shareholders can ask the court to order that the company be wound up. The court cannot make a winding-up order unless one of the circumstances set out in the Insolvency Act 1986 exists, for example:
The company suspends its business for a whole year.
The company is unable to pay its debts.
When a moratorium for the company (that is, a period of time during which creditors cannot enforce their rights) comes to an end and no voluntary arrangement is made.
Where the court is of the opinion that it is just and equitable that the company should be wound up. Shareholders typically rely on the "just and equitable" ground. Examples of grounds for such a petition include mismanagement and deadlock.
There is no general definition of "group" in UK company legislation. However, it is common to call a holding company and its subsidiaries a "group".
The terms "holding company", "subsidiary" and "wholly owned subsidiary" are defined in section 1159 of the Companies Act 2006. The Act recognises the concept of "group" in particular circumstances. For example, for the purposes of consolidated group accounts, "group" means the parent undertakings and its subsidiary undertakings (as defined in the Companies Act 2006). Groups are also recognised under tax legislation.
Financial Reporting Council
Description. This website contains useful corporate governance information, including the Corporate Governance Code, which is maintained by the Financial Reporting Council.
Spencer Summerfield, Head of Corporate
Travers Smith LLP
Professional qualifications. England and Wales, Solicitor, 1989
Areas of practice. Corporate; M&A.
Non-professional qualifications. BA, MA Law, Gonville & Caius College, Cambridge
- Advising Pace on US$2.1 billion sale to Arris.
- Advising Exponent on the sale of Trainline.
- Micro Focus on the merger with the Attachmate Group.
Professional associations/memberships. Member of the Law Society, UK.
- Public to private, The impact of Takeover Code changes.
- Public to private, Management buyouts of listed companies.
- Several chapters of "Tolley's Company Law".
Beliz McKenzie, Corporate Professional Support Lawyer
Travers Smith LLP
Professional qualifications. England and Wales, Solicitor, 2002
Areas of practice. Corporate; M&A.
Non-professional qualifications. LLB, King's College London
Professional associations/memberships. Member of the Law Society, UK.
Languages. French, Turkish
- Article on FRC corporate reporting in the Company Secretary's Review.
- Article on Listing Rule changes for Thomson Reuters Compliance Complete.
- Drafting and updating several "Tolley's Company Law" chapters.