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Balancing Majority and Minority Shareholder Rights in a Company

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The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our corporate team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.

Shareholders as the owners of a company have standard rights, fundamentally the right to vote on constitutional changes to the company. Such shareholder rights are split into the those of the majority shareholders and those of the minority shareholders, which can often have competing interests. These competing interests must be balanced in order for a company to operate smoothly. Here, Greenaway Scott takes a look at shareholder decisions and how the interests of both the majority and minority shareholders are harmonised within a company. Should you require any advice in relation to shareholder rights  please contact a member of our corporate team at [email protected] or submit a query through our website at www.greenawayscott.com/get-a-quote.

Shareholder decisions

Shareholders make decisions in general meetings. Most decisions such as appointing a director with a service contract of two years or more only require a simple 50% majority, often by show of hands. Majority shareholders may also call for a poll vote, meaning that each one share held results in one vote. Other decisions which are fundamental to the constitution of the company have a higher threshold, which require at least 75% of the shareholders to agree on a decision.

Majority shareholders control over the company

Any shareholder holding 25% or more of the shares in a company is considered to be a ‘person of significant control’ for the purposes of the Companies Act 2006 and would need to be registered on the PSC register which is visible at Companies House.

This share percentage in the company allows the majority shareholder to have control over the operation of the company, especially the board of directors. For example, a shareholder who owns 50% of the shares in a company has the power to authorise director decisions or block decisions where a 75% is required, clearly providing much power to majority shareholders.

Drag Along and Tag Along Rights

Drag along and tag along rights are used in order to harmonise the rights of the shareholders and to ensure the company operates smoothly. These rights can be incorporated into a company’s articles of association to balance the rights of majority and minority shareholders.

Drag along rights protect majority shareholder rights as it stops the company becoming stagnant. Within the articles, it will be stated that where an offer has been made to buy at least 75% of the company, the majority shareholders can force the minority shareholders to sell their shareholding. This clause is significant as buyers often want complete ownership over the company they are purchasing, as a result need to purchase the shares of the minority shareholders also. Equally, tag along rights can be drafted into the articles which protects minority shareholders. These clauses ensure that when majority shareholders have formed a deal with a third party to purchase their shares, they must also formulate a deal for the purchase of the minority shareholders. This ensures that minority shareholders are not left behind in a company with majority shareholders that they did not choose.

With companies having varying degrees of shares and shareholders, it is important that these clauses are included to prevent the company being at deadlock and unable to make substantial decisions. If minority shareholders can constantly prevent majority shareholders, their interests are overriding persons who have invested far more within the company. Equally, minority shareholders’ interests must be accounted for as it should not be the case that they are constantly dictated by majority shareholders. Having carefully drafted shareholders’ agreement and articles of association in place can therefore ensure both minority and majority shareholders interests are accounted for, along with what is best for the success of the company.

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