Minority Shareholders Agreements

Most companies in this country are "private limited companies". In other words they are not PLCs and their shares are not freely transferable on the open market.

In fact the articles of association (which are effectively the rules which govern the conduct of the company) frequently contain what are known as "pre-emption rights".

Pre-emption rights

A right of pre-emption is a right, to all intents and purposes, to require a shareholder to offer his shares for sale to other members of the company before they are offered to an outsider (even if it is possible to offer them to an outsider at all!)

Rights of minority shareholders

In general the person who owns more than 50% of the shares in the company has almost total control of what the company does.

He may hire and fire, vary contracts of employment, increase his salary, etc. etc. The only things that a person with just over 50% cannot do relate to increasing the share capital of the company and winding the company up. (This is something of an over-simplification because in certain circumstances if a majority shareholder is acting more or less fraudulently against a minority shareholder then the minority shareholder does get certain rights to go to Court - however these rights are expensive to enforce and of only limited benefit).

Rights of minority shareholders

Minority shareholders really have very few rights indeed and are subject to the whim of the majority shareholder.

What can a minority shareholder do?

A minority shareholder should therefore insist on a Minority Shareholders Agreement before he becomes a shareholder in the company. Such an agreement will cover such things as the appointment and firing of senior staff; the ability or otherwise of the majority shareholder to pay increased wages; the dividend policy the company is to have for profits for its shareholders; restrictions on changing bank; restrictions on incurring of material expenditure; restrictions on entering particular contracts; restrictions on making gifts or giving guarantees or granting mortgages over the assets of the company etc.etc.

With all these things in place the minority shareholder then does have some measure of control over the way that the company carries on its business and is not entirely the whim of the majority shareholder.

Unfortunately minority shareholders agreements are complex and although the basic skeleton of the agreement is fairly standard detailed discussions need to take place before such a document can be finalised.

However, if you are thinking of investing many thousands of pounds into minority shares in a private company such an agreement is really of vital importance.

Without such protection you might just as well give the money away because that is what you would, in most circumstances, be doing.

Conclusion

Without the consent of the majority shareholder the minority shareholder cannot get his investment back; cannot sell his shares; cannot control the company; cannot stop the majority shareholder from taking all of the profits for himself etc.etc. Would you hand over your money in such circumstances? To borrow (and add to) a well known phrase you should "get the protection of a minority shareholders agreement around you".

If you require further information on this topic please contact Keith Turner on 01604 622101 or email: companylaw@turner-coulston.co.uk