If you happen to be a shareholder in a UK-registered company, it is natural to have questions regarding your responsibilities towards fellow shareholders and the company as a whole. One common query may pertain to your liability in case the company is unable to repay its debts. Moreover, you may also be curious about your obligations towards other shareholders and how to assert your rights in the event of a disagreement. This article aims to give you a comprehensive understanding of the different obligations and rights associated with being a shareholder.
Obligations vs Rights
Obligations and rights are interconnected concepts, representing two facets of a relationship. When someone, like Rahul, is obligated to fulfil a duty or responsibility to you, it gives you the entitlement or claim to certain rights in relation to Rahul. Conversely, if Rahul possesses a legitimate right that you must uphold, it necessitates that you fulfil an obligation towards Rahul.
An obligation encompasses a necessary action that must be fulfilled for a specific purpose. For example, when you enter into a legal agreement, you are bound by a contractual obligation to uphold your part of the agreement. Failure to do so may result in legal consequences.
In essence, this implies that a court possesses the legal power to compel you to either abstain from or execute a specific action outlined in the contract. Likewise, they have the authority to require you to provide monetary compensation as a result of your failure to fulfil your obligations.
Conversely, rights pertain to your capacity to compel another individual to fulfil their own duty with your support or benefit. In the event that they fail to do so, you have the option to file a petition with a court, requesting an order for them to comply or to provide monetary compensation in lieu of their non-compliance.
Under the framework of company law in England and Wales, it is often observed that shareholders are bestowed with a greater number of rights compared to the obligations that are imposed upon them.
Limited liability refers to the principle that even though shareholders own a company, their responsibility for the company’s obligations is limited.
Typically, shareholders are only liable for the value of the company shares they have paid for. Therefore, as long as the company is expanding and meeting its financial obligations in a timely manner, this is not a cause for worry.
In the event that a company is no longer able to fulfil its financial responsibilities, it may face insolvency proceedings initiated by its creditors seeking to recover their funds. Typically, in such situations, the company lacks sufficient funds to fully repay all its creditors. Under the principle of limited liability, shareholders cannot be pursued for any outstanding amounts unless there is evidence of fraud or illegal activity.
Duties as Stated in the Articles of Association
The company’s articles of association serve as the main set of regulations that establish the guidelines for the company’s operations and the dynamic between the company and its shareholders. It establishes a specific agreement between:
- Each individual who holds shares in the company seems to be an important aspect to consider.
- Every individual shareholder and the remaining shareholders.
In regards to your responsibilities, the articles will outline specific obligations that you, as a shareholder, must adhere to. Failure to do so may result in another shareholder having a legal claim against you or the company. Some common examples of these obligations include voting and dividend rights.
The provision of terms in articles that attempt to establish a legal obligation between shareholders and individuals not acting as shareholders will have no impact. This remains the case even if the beneficiary of such a provision is a shareholder.
Suppose you are a shareholder in a company, along with several others. Let’s assume that your company’s articles include a provision stating that another shareholder has the right to become a director, but this provision is being ignored. In such a scenario, the affected shareholder will not have the ability to take legal action against you or the company as a shareholder. This is because the provision primarily pertains to their role as directors and not their status as shareholders.
As an individual who holds shares in a company, you are not burdened with significant legal responsibilities. However, if you also hold a position as a director in the company, you will have numerous obligations towards the organisation. It is important to understand that these duties are separate and distinct from your role as a shareholder in terms of legal considerations.
If you engage in contractual arrangements with fellow shareholders (known as “shareholder agreements”), you will be obligated to perform certain duties and responsibilities towards the other shareholders based on the contract terms. However, it’s important to note that these obligations do not arise from your role as a shareholder.
Essentially, both the company and the shareholders are protected from any legal action in case of a breach of the agreement. In other words, they are not permitted to file a lawsuit against the company for violating the terms of the agreement, Nor can they sue you as shareholders.
Articles of Association
Inclusive Articles Outlining Shareholder Rights
- The method through which shareholders have the ability to designate directors.
- The minimum number of voting rights that shareholders must possess in order to convene meetings.
- As a knowledgeable audience, it is essential to be informed or consulted prior to the directors making a specific decision on behalf of the company.
In order to gain a comprehensive understanding of your shareholder rights, it is essential to examine the articles of association pertaining to your company. Fortunately, shareholders are granted the right to review specific company documents, including the articles of association and financial accounts. You can find Crowthorne solicitors via Google to learn more about them.
The law guarantees specific rights that are non-negotiable and cannot be eliminated, even if the articles of association attempt to do so. An illustration of this is the shareholders’ entitlement to dismiss a director.
Additional instances encompass the privilege of:
- It is expected that you will receive a share certificate within a period of two months after the allotment.
- Examine specific corporate documents and records, in addition to receiving annual updates.
- Participate in gatherings for shareholders, such as the yearly general assembly.
- Participate in corporate shareholder meetings by casting your vote.
- In specific situations, it is possible to make a formal request to the court.
Various Categories of Shareholders
It is not uncommon for companies to possess various categories of shares, each carrying distinct privileges in comparison to other categories of shares. Differentiating factors often encompass:
- Entitlement to receive dividend payments;
- The right to vote
- In the event of a company’s closure, individuals are entitled to receive their invested capital back.
Equitable treatment of shareholders within the company is paramount.
Enforcing Your Rights
If a shareholder’s rights have been violated, there are three distinct methods by which such shareholders can pursue the enforcement of their rights. All three methods necessitate the filing of a petition with the court. Should the court find substantial evidence, it has the authority to rule in favour of the shareholder.
If you happen to possess the same class of shares as all other shareholders, except that you are the only one who does not receive a dividend payment, it can be considered an instance where the company’s actions have been deemed “unfairly prejudicial” towards a specific shareholder. It is important to keep in mind that a company is obligated to treat shareholders of the same class impartially.
In certain instances, directors have the ability to exert control over a company in a manner that effectively excludes a minority shareholder. One prevalent example involves intentionally withholding information about meetings from the minority shareholder, thereby deliberately depriving them of their rights.
If you are able to demonstrate to the court that the behaviour is “unfairly biassed” against you as a shareholder, the court possesses extensive authority to issue a directive. The typical directive is for the remaining shareholders to acquire your shares at a price that reflects the current market value.
Closing Down a Business
In certain situations, there is a possibility of requesting the court initiate the liquidation process for your company. This entails selling off all the assets of the company and returning the capital to each shareholder based on their respective ownership stake.
Examples of Two Typical Instances Where This Arrangement Is Successfully Achieved Are When:
- Management is currently unable to reach a consensus on the appropriate way to operate the company.
- The company’s operations have become unsustainable, and it is no longer able to continue conducting business.
It is more frequent to resort to a claim based on unfair prejudice rather than employing the extreme measure referred to as the “nuclear option.”
A Derivative Claim
In the context of corporate law, A derivative claim refers to a specific type of claim in which a shareholder, or a group of shareholders, initiates legal action on behalf of the company, rather than in their personal capacity. This occurs when the company has suffered harm or has been subject to wrongdoing.
The primary scenario in which shareholders may initiate a derivative claim is when directors engage in fraudulent conduct.
In general, shareholders possess greater rights than responsibilities. Their responsibilities are relatively limited in scope. The primary obligation that shareholders hold is their limited liability for the debts of their company. Conversely, shareholders have broader rights. These rights are typically outlined in a company’s articles of association. Additionally, the law provides shareholders with specific mechanisms to enforce their rights against the company or fellow shareholders.