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The rights of minority shareholders in any company are based on the constitution of the company, which is made up of its Articles of Association, its resolutions, shareholder agreements and associated documents such as directors’ service contracts.
Minority shareholders’ rights are also set in statute, most obviously the Companies Act 2006 but also other acts such as the Insolvency Act 1986. Also, common law, which is the law based on cases decided by the court that set a precedent for similar cases to follow.
You can read the Model Articles of Association (Model Articles) by clicking HERE.
Under these Model Articles, minority shareholders have the following rights.
Part 4 Article 42 refers to minority shareholders having voting power proportional to their holdings, ensuring they can participate in the governance of the company.
Part 1 Article 4 (1) read in conjunction with Section 283(1) of the Companies Act 2006, specifies that a special resolution requires a 75% majority of the votes to pass. This provision can act as a safeguard against the majority’s dominance in key decisions.
Part 3 Article 30 talks to dividends which must be distributed fairly, preventing the majority from withholding or manipulating dividend payments to the detriment of minority shareholders.
To see what terms are often included in a shareholder agreement to protect minority shareholders, please read our article on Understanding Shareholder Agreements
Within the Companies Act 2006 minority shareholders are granted the following rights:
Financial Information
Decision-Making and Meetings
Dividends and Shares
Remedies
Below we set out the most common problems encountered by minority shareholders and the remedies available under the law.
Minority shareholders often find themselves excluded from vital financial or management information about the company. This can make it challenging to assess the company’s performance. Particularly important if you are trying to determine whether or not you are receiving the dividends you should.
Under the Companies Act 2006, shareholders have statutory rights to certain information. For instance, Section 431 entitles shareholders to receive a copy of the company’s annual accounts and reports. Additionally, under Section 388, shareholders have the right to inspect the company’s records and accounting documents.
If access is refused, shareholders can apply to the court to enforce these rights and obtain an order compelling the company to provide the requested information. This ensures transparency and accountability from the directors.
If the company is not declaring any dividends, you need to see the financial information of the company. Please read the section above.
If a dividend is declared, that is a different situation. Declaring the dividend creates a debt owed by the company to each shareholder.
If the directors are not paying dividends when they should, as a minority shareholder you can issue a Section 994 petition (often called minority shareholder or unfair prejudice petitions) for those dividends to be paid, if you are able to show that it is unfair not to and that non-payment is prejudicial to your interests. Read more on Unfair Prejudice Petitions.
For mismanagement by directors to be actionable, it must go beyond mere poor judgment; it typically involves a breach of directors duties or fiduciary duties or negligence that harms the company and leads to a decline in the value of shareholders’ investments. Read more in our article on Director’s duties and Fiduciary duties.
Where mismanagement has directly harmed the company, a shareholder can bring a Derivative Claim, on behalf of the company under Sections 260–264 of the Companies Act 2006.
A common problem faced by minority shareholders is being removed from the board and excluded from any role in decision-making, often to limit their influence within the company. If a shareholder is unfairly removed as a director, they may file an unfair prejudice petition under Section 994 of the Companies Act. This provision allows minority shareholders to seek relief if the company’s affairs are being conducted in a way that unfairly prejudices their interests.
In these cases, the court may order remedies such as reinstating the director, issuing compensation, or even ordering a buyout of the minority shareholder’s shares at a fair value. Read more about Unfair Prejudice Petitions.
If a company’s directors are acting in breach of their directors’ duties to the company, minority shareholders have the right to ask the court for permission to bring a claim against directors on behalf of the company. This is called a Derivative Claim. This action gives you as a minority shareholder, the ability to seek remedies on the company’s behalf, addressing the issues and recouping the losses caused by failing or dishonest directors. Read more about Derivative Claims.
Shareholders can file a Section 994 petition when the company’s actions unfairly prejudice their rights, such as by excluding them from decision-making or withholding dividends. The court may order a number of different remedies. The most common one granted is for an order that the company or other shareholders must buy your shares at a fair price. Read our article on Unfair Prejudice Petitions.
Minority shareholders can seek to have a company wound up if they can prove that it would be “just and equitable” to do so under section 122 (1) (g) of the Insolvency Act 1986. This route is often pursued in situations where there has been serious misconduct by directors, a breakdown in trust, or exclusion from management, especially if the company is a “quasi-partnership,” meaning it was initially run with an expectation of mutual trust.
Courts have considered several circumstances under which a “just and equitable” winding-up might apply some examples are:
Winding-up petitions are more likely to succeed when there’s significant evidence that no other resolution would fairly protect the shareholder’s interests. Courts tend to prefer a remedy that allows the company to continue operating,
Before pursuing a winding-up petition, it is best to consider whether a Section 994 Petition is best.
