The Companies Act 2014 grants minimum protections to a minority shareholder in a private company. Firstly, so long as a minority shareholder has more than 25% of the voting rights, they can block special resolutions being passed by the other shareholders. Special resolutions are required to pass certain key decisions in company law, such as to change the constitution of the company or to increase the authorised share capital of the company. If they have more than 20% of the voting rights, they cannot be squeezed out in a takeover whereby the offeror can force the minority to sell their shares if the 80% have approved of the sale.
If a shareholder has less than 20%, the main protection available in company law is that the minority shareholder can bring legal proceedings if the majority have acted in disregard of their interests or in a manner oppressive to their interests. The court has a wide discretion to act to remedy that wrong but, if relations have broken down so much between the shareholders, a court is most likely to order that the minority shareholder be bought out as the most equitable and sensible remedy. In practice, it may be difficult to prove that actions do amount to oppression so this is really a last resort step. Ideally, matters would not reach that stage and the best way of avoiding such conflict is by way of a well drafted shareholders’ agreement that seeks to strike a balance between the rights of a majority shareholder, while giving the minority shareholder some crucial protections in certain negotiated key areas.
A shareholders’ agreement is subject to negotiation between the shareholders but typically a minority shareholder might seek to negotiate protections and additional rights concerning the following:
- the right to appoint a representative(s) to the board of directors;
- the right to receive ongoing and regular information on the trading performance of the company;
- a veto over certain key decisions being taken by the majority alone (e.g. the issuance of further shares, incurring additional debt above a certain threshold, making a material change in the direction of the business of the company);
- a pre-emption right whereby the minority shareholder would have first option to buy any new shares issued in proportion to their existing shareholding so they are not further diluted;
- a pre-emption right in the event that other shareholders want to sell their existing shares such that they have to offer them to the minority shareholder first;
- enforcement remedies if there is a breakdown in relations (e.g. provision for an independent arbitrator or chairperson to break a deadlock, and a mechanism whereby a shareholder can be bought out if there is a complete deadlock and in such regard, how the sale price would be set fairly).
Apart from the legal certainty and protections that a shareholders’ agreement would hopefully provide to the parties, the main other advantage of including such protections in a shareholders’ agreement is that it is generally a confidential agreement. In contrast, the constitution of the company is a publicly filed document and there could be privacy concerns about disclosing such protections to the wider world.