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A Limited Company is owned by its shareholders, who have a major role in the running of the company. Under the Companies Act, shareholders have many legal rights. As a Director of a Limited Company, it is your responsibility to take care of the rights of shareholders. In this article of 'Path of Education for New Contractors', we look at two issues related to shareholders.
- Shareholder's Agreement
- Rights of Shareholders
Shareholder's Agreement:
When forming a company and issuing the first shares, it is important to create a shareholder's agreement. A shareholder's agreement helps to protect the interest of all key shareholders, including you. While there may be a high level of trust between the different shareholders, a formal shareholder's agreement is always useful if there are any disputes in the future.
Some key things to be included in a shareholder's agreement:
- Rights of shareholders
- Obligations of shareholders
- Rules regarding issue and transfer of shares
- Process for key decisions
- Policy for dividends
- Procedures for resolving disputes
- Protection for minority shareholders
Let's look at some examples of the points mentioned above.
- Issue and transfer of shares: A shareholder's agreement can include rules around how shareholders can sell shares. Such rules can prevent any third party from acquiring shares of the company without the consent of other shareholders or the Board of Directors.
- Protection for minority shareholders: Normally, all the decisions in a Limited Company are taken by majority. However, minority shareholders can include some clauses in the agreement that insist on approval of all shareholders, and not only majority shareholders, for certain decisions. While highly impractical for all decisions, including such conditions in the agreement for important decisions can help the minority shareholders.
- Major decisions: The shareholder's agreement can outline the role of shareholders in major decisions of the company. These decisions can include; key appointments such as Directors, compensation of executives, major investment decisions, seeking additional finances, and so on.
The above are some examples of what to include in a shareholder's agreement. Your company's shareholder's agreement can have its own specifics, but the main idea is to outline the role and obligations of shareholders.
Rights of shareholders:
Note that a shareholder's agreement is not a legal requirement, and companies may choose to not have one. However, whether you have a shareholder's agreement or not, there are certain general rights available to shareholders. A Limited Company must, however, have an 'Articles of Association' agreement, which governs the way the company is run and shareholder input.
- General Meetings: It is a basic right of the shareholders to attend all general meetings. The Director is responsible for informing the shareholders about any Annual General Meetings and Extraordinary General Meetings. However, shareholders need not be called for any company Directors' meetings. Shareholders also have the right to vote in general meetings, depending on the share class.
- Company's profits: If a company is making profits and declaring dividends, shareholders have the right to get a dividend. However, it is entirely up to the Directors whether they want to declare a dividend or not. Even if a company is making a profit, Directors can choose not to declare dividends in some years. Also, the Director's recommendation on dividends is final, and shareholder's vote cannot change the recommendation.
- Company documents: Shareholders have the right to receive company Annual Reports and account statements. Also, as per the Company's Act, shareholders can demand to see several documents like Articles of Association, minutes of any general body meetings, etc. Moreover, if the Directors and other shareholders have issued any written resolution, shareholders have the right to receive such resolutions.
- Company's Funds if Company is shut down: Shareholders have the right over the remaining funds of the company if it is wound up, but not the first right. If a company is closing, the creditors of the company have the first right over the funds. Within the shareholder tier, preference shareholders get priority over ordinary shareholders for distribution of funds.
- Pre-Emption rights: Some existing shareholders are provided with pre-emption rights, which allow them the first right to any new issue of shares. If they don't have the funds, they can waive off the right, and make way for new shareholders. Pre-emption rights ensure the ownership structure of existing shareholders is not diluted or reduced without their approval.
Conclusion:
A Limited Company cannot be fully effective if it ignores the rights and obligations of shareholders. If ignored, in some cases this can even lead to costly legal disputes. Among the various obligations towards shareholders, one of the key obligations of a Director is to keep the shareholders informed of all relevant developments. As a Director, you may have many other priorities, and there's a risk of you unintentionally missing out on key communication to shareholders. A good accountant can help you in this area through their Company Secretarial services, which takes care of all important correspondence with shareholders.
Further Reading
- Limited Company Dividends
- Limited Company Shares - An Overview
- Limited Company Shares - Issuing of Shares
- Limited Company - Transfer of Shares
- Limited Company - An overview
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