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Minority shareholder rights and protections



Sun 8 October 2023 Minority shareholder rights and protections

Minority shareholder rights

The reality is that unless you protect your interests as a minority shareholder, under English law, you will have few protections. Even where you may be able to take legal action, typically claiming unfair prejudice, you will probably find that the damage to your interests has been done, you will need deep pockets and strong nerves to litigate. By far the best approach is to consider protecting your shareholder rights at the time you invest.

What general protections are there for minority shareholders?

Under current English law, not much. If you don’t have a comprehensive shareholder agreement with enhanced protections and the company’s articles of association are standard, the position, generally speaking is :-

So, if you have invested into a company where the majority shareholder is a director and you are not, you don’t have enhanced protections in a shareholder agreement and the company has standard articles, you are very vulnerable. The directors have day to day control of the business, and this means you will have very little ability to stop the majority shareholder/director doing exactly what they want, potentially to your disadvantage. Any blocking rights you may have, as detailed above, are likely to be of little use to you,

What are the biggest risks for minority shareholders?

Without a shareholder agreement and/or amended articles of association, situations that can and do arise regularly with private UK limited companies include :-

Specific risks for employee shareholders?

Bad leaver provisions in employment contracts and where the employee is a minority shareholder and/or an employee who has share options which have not yet vested can be very unfair on employee shareholders. Specifically : -

Ways to protect yourself as minority shareholder

The starting point is that you should seek to address the issue of suitable protections at the time you become involved with the company. Do not take things on trust or at face value and think about what could go wrong and your potential position on exit.

 Agreeing to deal with issues later rarely works to a minority shareholders’ advantage. If the majority shareholder is not prepared to consider your concerns this ought to be a serious red flags for you, whether you are investing a significant sum or are on a promise of future benefit without cash investment.

The usual ways to protect yourself will be via a shareholder agreement and/or enhanced protections in the company’s articles of association. For employee shareholders the employment contract and terms of any share scheme plan are also extremely important.

In terms of specifics :-


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