Shareholders are people (or sometimes other companies) who invest money into a company in return for shares (also known as ‘equity’). Each share is a slice of the company. One share can be a big slice or a very thin slice, depending on how many shares the company has issued in total.
The number of shares a shareholder owns divided by the total number of shares in issue represents how much of the company they own. It is often expressed as a percentage. This figure determines their level of influence over the company via their rights to vote at important meetings. Their voting rights are often proportional to their percentage shareholding.
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The number of shares they hold also determines the rewards they stand to gain via dividends and increases in the share price.
A shareholder takes a risk by buying shares in a company. The company may succeed or it may fail; when a shareholder buys shares, the fates of their money and that of the company become intertwined. If the company fails and is wound up, its shareholders may or may not get the value of their shares back. They will not be repaid until all the company’s creditors and suppliers have been paid what they are owed. If there is no money left after those repayments, they will go away empty-handed. This is the risk of investing in a company via equity.
At one end of the spectrum, many small companies are owned by just a single shareholder, who may (or may not) also be the sole director. Whether there are 1 or 100,000 shares in issue, if they’re all owned by the same person then that individual can effectively control the company.
Charlie is the sole shareholder of Stowsweep Limited. Ultimately, therefore, he controls the direction of the company and will be able to make important decisions affecting it. Charlie also happens to be the sole director, although he could choose to appoint others to help him manage the business day to day (without necessarily offering them shares in the business). As the sole shareholder, Charlie will be the only person to benefit from any dividends the company pays or from an increase in the share price.
In contrast, many larger listed companies have tens of thousands of shareholders, each of whom are likely to have invested a relatively small proportion of the overall value of the company and therefore have very little influence over the company’s strategy. A company is unlikely to have more than 20 directors – even that number would be exceptional – so necessarily most of the shareholders (if not all) will not also act as directors.
Fiona holds 5 shares in Clifftop Enterprises plc, a large multi-national company with over 10,000,000 shares currently in issue. While Fiona will have the right to vote on certain decisions affecting the company, with such a small percentage of the shares in issue her influence over the company’s future is very limited indeed.
While a shareholder’s rights and level of influence generally depend on the number of shares they hold, care should be taken where a company has multiple classes of share or shares of different types in issue. Different types or classes of share may entitle the holders to different rights. One class may have greater rights to vote, receive dividends or receive capital payments than another class. These particulars should have been read and agreed upon beforehand by the purchaser of the shares.
A shareholder can be an individual person or might instead be a joint shareholder, whereby two or more people (like a husband and wife) hold shares together jointly.
A company can also own some or all of the shares in another company. These companies are known as corporate shareholders.
Special care should be taken to get the details right where entities that are not companies wish to own shares – for example trusts, partnerships, clubs and pension schemes. In some cases the law may not recognise the group or organisation as a legal entity in its own right, meaning shares may need to be held in the names of individuals rather than in the name of the entity.
At the point of incorporation the company will have one or more shareholders (a company’s first shareholders are also called subscribers). After that, the number of shareholders may rise and fall. New shareholders may be added either by the company choosing to allot new shares or by existing shareholders transferring shares to a new shareholder.
What does a shareholder do?
Despite being the beneficial owners of a limited company, shareholders do not manage the business on a day to day basis – they instead delegate this responsibility to the directors (although, as we have seen, there is nothing to stop someone performing both roles).
Shareholders have a number of rights and are able to ensure the directors do not go beyond their delegated powers. The shareholders also have the power to make major decisions affecting the business, which they typically exercise through voting on resolutions at general meetings.
While some of the areas where decision-making authority is retained by the shareholders will be detailed in the company’s articles of association, they will usually include:
- The (re-)appointment of the board of directors
- Removing directors from office
- Deciding which rights and powers to grant to the directors
- Setting or approving directors’ remuneration
- Approving changes to the company’s name
- Approving changes to the company’s structure
- Approving changes to the company’s articles of association
- Authorising dividend structures
- Approving substantial investments or asset disposals
- Approving mergers or acquisitions
- Changing the rights attached to one or more share class
- Making changes to the company’s share capital, including capital increases
Through decisions like these, the shareholders exercise their ultimate control over the company. Alongside provisions in the company’s articles of association, the shareholders may choose to put in place a shareholders’ agreement to help protect their investment and govern their relationship with the company and one another.
Potential rewards of being a shareholder
Being a shareholder means you are potentially able to benefit from the company’s success.
People purchase shares in a company in the hope that it will grow its earnings and profits over time, which is likely to make the shares more attractive to other investors. If a company succeeds in raising its share price, the shareholder will be able to sell their shares at a profit.
Andrew buys 1,000 shares at £1 each in Omicron Gold Mining Limited, a total investment of £1,000. Over 5 years, the company’s exploration efforts identity several new gold deposits on lands owned by the company. The share price rises to £5, and Andrew decides to sell his holding at a substantial profit of £4 per share, a total profit (also called a ‘capital gain’) of £4,000. Depending on his individual tax position, Andrew may have to pay capital gains tax on the gain he has made.
Shareholders also have the right to receive dividends, a part of the company’s profit that it decides to pay out. If a company doesn’t make a profit, it won’t pay a dividend. Even if the company is profitable, dividends are not guaranteed – the directors may instead decide to reinvest the profits into the business rather than make a payment to shareholders.
Jane holds 10,000 shares in Piptexx Energy Limited. After a strong year, Piptexx makes a considerable profit and, as a reward for their loyalty, the directors decide to pay out part of this in the form of a dividend. A dividend of 50p per share is declared: with 10,000 shares, Jane receives a dividend of £5,000. Jane may have to pay tax on the dividends she receives.
Existing shareholders may have pre-emption rights when new shares are available, giving them first refusal over a certain number of shares. They might also be eligible to participate in a range of corporate actions, like when a company offers to buy back shares from its shareholders.
Holding shares in certain companies may also give the shareholder additional ‘perks’. For example, they might receive discounts on the company’s products or access to special offers.
Risks of being a shareholder
Share prices can go down as well as up, so shareholders must be prepared for the possibility of losing money. Share prices might fall and, at worst, the shareholder could lose all the money they have invested. Alongside that, the shareholder also sacrifices the return they would have made if they’d put the money into a more successful investment.
Chris and Graham both decide to invest in Calypso Holiday Parks Ltd, each investing £2,000 for 2,000 shares at £1 per share.
A series of severe storms hurts the business and, when Chris decides to sell, he is only able to find someone willing to buy his shares for £0.30 per share, meaning he makes a loss of £0.70 per share – a total loss of £1,400. He takes away £600 of his original £2,000.
Graham decides to try to weather the storm, but mismanagement by the company’s directors means the company continues to falter and eventually fails completely. At that point, Graham is unable to find a buyer for his shares at any price, and it’s possible he’ll lose the whole of his £2,000 investment.
If the company fails, the company’s assets will be sold and the proceeds distributed to creditors, but shareholders may still receive nothing of their original investment. This is particularly likely for holders of ordinary shares, who sit at the back of the queue behind lenders and holders of most other types of shares.
However, unlike participants in some other types of business, shareholders are themselves protected from most company liabilities because of the ‘limited’ nature of a company. The law recognises a company as an entity in its own right, distinct from its shareholder owners and therefore responsible for meeting its own debts and other liabilities.
“ … it is the company itself which is responsible, not the shareholders, so their personal assets are not at risk.”
Each shareholder’s responsibility extends only to the value of the shares they own. Typically, the shareholder will have paid this when they were allotted shares or had the shares transferred to them. However, in some cases companies have unpaid or partly paid shares where the liability to pay for shares remains until the company makes a call for payment.
That means that, if a company owes money or completely fails, it is the company itself which is responsible, not the shareholders, so their personal assets are not at risk. As long as shareholders have paid for the shares they own, anyone owed money by a company that cannot or will not pay can’t expect the individual shareholders to pay the debt. This type of financial protection is often cited as one of the main advantages of running a business as a limited company.
What shareholder information is available on the public register?
In the initial IN01 form to incorporate the company, the company must provide the following details of each of its shareholders:
- Full name
- Contact address
- Class(es) of shares held
- Number of shares held in each share class
- Nominal value and currency in which the shares are denominated.
Changes to a company’s shareholders and their details must also be submitted to Companies House as part of the confirmation statement (which replaced the annual return from 30 June 2016). However, changes of address for shareholders do not have to be reported.
These details form part of the public register which anyone can check online, even once a company is dissolved. If privacy is particularly important, it’s possible to appoint a nominee shareholder in order to protect your anonymity, but companies who offer it will make a charge for this service.
The company must also maintain a register of shareholders, which lists the shareholders’ full names and addresses and their shareholdings. This is the definitive record of who is a current shareholder in the company (as opposed to an individual or organisation simply bearing a share certificate). As the register of members must be available for inspection at either the company’s registered office address or a SAIL address, it’s important that the directors arrange for it always to be kept up to date with the latest position.
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This article was originally published in 2015. The most recent revision was in October 2023.