Shareholders are vital to any limited company. Here are a few of the rules, rights and obligations of shareholders in the UK including day-to-day running of the business.
A limited company is created by one or more shareholders. The shareholders own or buy shares in the company.
A shareholder has rights over the company, rights known as ‘shareholders’ rights’.
The shareholders’ rights are usually set out in the articles of association of the company, which constitute written rules that govern how the company operates. These articles may say that certain shareholders can exercise these rights.
There are certain limits to shareholders’ rights, but a benefit is the potential to receive a dividend payment from any company profits.
Shareholders’ rights arise mainly from the Companies Act 2006, the Companies Act 1985 and the Companies Act 1993. However, these may be modified by the company’s articles of association, a shareholders’ agreement and possibly under the terms of a specific share issue.
Certain shareholders’ rights are enforced through issuing proceedings through a court. A company will normally be required to respond within 28 days. If the company fails to respond, the shareholder can apply for a winding-up order.
If the company is sold
Crest Legal explain the impact of drag and tag rights on shareholders.
The drag along clause requires the minor shareholder to sell their shares. The tag along clause requires the minor shareholder to be allowed to join in on a sale.
Shareholders have the right to receive notice of general meetings of the company (and to attend them).
Shareholders have the right to receive a copy of the annual accounts as well as to receive a copy of the company’s annual report and auditor’s report, as well as auditor’s opinion on the accounts.
Shareholders can share in the profits of a company in the form of dividends.
It is not compulsory for companies to pay dividends. It is entirely up to them how much to pay. It is usually more profitable for a company to reinvest its profits, so most do not declare a dividend. But if they do declare a dividend, they can pay it in shares, or in cash.
Reports and accounts
The annual report and accounts are particularly important. They contain information about the company’s financial performance and position. They also tell you whether the directors have done a good job and whether they have conflicts of interest.
One of the crucial roles that shareholders have is to protect the long-term investment interests of all the other shareholders. Shareholders have to make sure that the company’s directors act in a fully informed, responsible way.
Share rights are often set out in a company’s articles of association and determine what the payment to shareholders should be on winding up.
Businesses can also give preference shares that might give the holder preferential rights to dividends and on a winding-up.
The Insolvency Act 1986 provides for a number of other methods where the shareholders can take control of the company.
One of the most popular way is by using the members’ voluntary winding-up provisions, where shareholders will adopt a special resolution to wind up the company.
Under this procedure, the shareholders will appoint a liquidator. Liquidation can also occur if there is no other shareholder or member to manage the company.
If the company has only one member and they resign, for example, then under Section 626(1) of the Companies Act 2006, it is automatically dissolved. If the company has more than one member and all leave, then Section 641 (1) of the Companies Act 2006 allows another member to apply to court for an order that their shares should be transferred to another member.
For more on how to wind up a limited company with or without debts, see Begbies Traynor.