The basic rights of minority shareholders can be enhanced by amending the company’s articles and/or the shareholder agreement. It is advisable to do this at the outset as should a dispute arise it is unlikely that the majority shareholders will be willing to pass a resolution to assist a minority shareholder. Time and costs can be saved if the shareholders collectively agree to amend the articles or the shareholders agreement before the shares are acquired.
Common examples of minority shareholder protection include:
- Information rights. Often minority shareholders suspect the business is not being managed properly or being run solely for the benefit of major shareholders. Controlling shareholders and directors will often refuse to voluntarily disclose information. In practice, one of the most important provisions to include for a minority shareholder is the right to access financial records and management accounts. The right to see financial data will not arise automatically under the Companies Act but can be created via the articles or shareholders agreement.
- Power of veto. Minority shareholders can, with suitable changes to the articles or shareholders agreement be given powers of veto. A power of veto can be used to block actions unless the minority consents. For example, a minority shareholder could be given the power to block business sales and mergers, expenditure above prescribed limits, winding up or voluntary liquidation or large-scale investment.
- Dilution of shares. Under the Companies Act shareholders are given the right to subscribe for shares under any new share issue. In some companies this right is disapplied in the articles or shareholders’ agreement. In other cases, the shareholder may not be able to subscribe and hence suffer dilution – wealthy shareholders may use this power to drown out minorities by fixing artificially high subscription prices.
