Shareholders’ rights: the basics

Written by

Published in on

0 comments | Tags: ,

While shareholders collectively own a company, they do not control the day to day running of it. That’s the role of the company directors. In exchange for their investment, however, shareholders have a range of rights that give them power over certain major company decisions.

Shareholders’ rights arise in the main from the Companies Act 2006. But they can be modified by the company’s articles of association, a shareholders’ agreement and possibly the terms of a specific share issue.

Different shareholders’ rights may also attach to different classes or types of share.  Some are only available to those with a certain percentage of the shares in issue.

The details of the rights attached to a share class are given in the ‘prescribed particulars’ for that share class.

Manage your company's shares the easy way

Inform Direct is the innovative and straightforward way to make new share allotments, record share transfers and process share reorganisations.

Start now

In this article we look at the most basic shareholders’ rights that come with the ownership of shares. They usually apply to all shareholders, regardless of how many shares they hold.

1 To attend general meetings and vote

All shareholders have the right to receive notice of general meetings and attend them. This includes both Annual General Meetings and Extraordinary General Meetings. This does not extend to meetings of the company directors.

Shareholders will usually have the right to vote at the General Meeting. Typically, shares will carry one vote each but that’s not true in all cases. Possible exceptions include:

  • There may be non-voting shares which carry no voting rights at all
  • Some shares may give the holder the right to multiple votes per share
  • Some shares may only give a right to vote in certain circumstances.

If the shareholder cannot attend a General Meeting, they also have the right to appoint a proxy to attend and vote on their behalf.

2 To receive a share of the company's profits

The company can choose to distribute profits by payment of a dividend to shareholders. A dividend can only be paid from profits. However, even if the company is profitable there is no obligation on the directors to declare a dividend. Shareholders cannot vote to pay a dividend which is more than the directors have recommended. They can vote to reduce the dividend though, if they feel it is excessive and would damage the company’s balance sheet.

Usually the dividend will be a certain amount paid equally per share, although variations from this are possible. Some classes of share might have no right to dividends or only qualify for dividend payments if certain conditions are met.

To allow for the use of multiple share classes, a company’s articles of association cannot rely on the standard Model Articles. Therefore, Inform Direct provides improved articles of association that incorporate various enhancements to the Model Articles and enable the use of multiple share classes.

3 To receive certain documents from the company

The main documents of interest to shareholders will be the company’s annual report and accounts. Each shareholder has the right to receive these when they’re issued, and on request. Shareholders also have the right to receive a copy of any written resolution proposed by either the directors or shareholders.

Many companies will issue other documents and updates about the company. However, it’s worth noting that shareholders have no automatic right to receive most other documents. For example, they cannot usually demand to see copies of the management accounts prepared for the directors.

While there is no absolute right in law to receive a paper share certificate, most companies will issue them

We often get asked whether shareholders have the right to receive a share certificate. While there is no absolute right in law to receive a paper share certificate, most companies will issue them and it’s often required by the company’s articles of association. A shareholder does, however, have a right to have their name listed in the company’s register of members. This register constitutes legal proof that someone is a shareholder in the company.

4 To inspect statutory books and constitutional documents

The Companies Act 2006 gives shareholders the right to ask to see a number of documents. These include:

  • The Register of Members(under section 116 of the Companies Act)
  • The terms of directors’ service agreements (section 228)
  • The terms of directors’ indemnity provisions (section 237)
  • Records of resolutions and minutes of general meetings

Shareholders also have a right to access the company’s constitutional documents – usually made up of at least the memorandum and articles of association. These documents may lay down additional rights of shareholders or restrictions on shareholders rights. So it’s a good idea for all shareholders to look at them.

5 To any final distribution on the winding up of the company

If the company is wound up, creditors will generally all need to be paid first out of any funds available. If, however, there are then surplus funds, these monies can be shared amongst the shareholders – usually in proportion to the number of shares they hold. However, different share classes may have different rights to a distribution in these circumstances.

Alongside the rights of shareholders, there is some protection afforded to the owners of a company by the responsibilities of directors, which again have their origins in the Companies Act 2006.

Shareholders can have other rights which are less fundamental than the above five but still very common, such as pre-emption rights. The above outlines the most basic rights that apply to nearly all shareholders in UK companies limited by shares.

6 To pre-emption on purchase when new shares are issued

Shareholders usually benefit from pre-emption rights – the right to first refusal when the company issues new shares. The new shares must be offered to the existing shareholders before they are offered to other potential investors. This allows the existing shareholders to retain their percentage shareholding rather than see it diluted when new shares are issued. For more information please read our main article on pre-emption rights.

This article was first published in March 2014. The most recent update was in August 2023.

Inform Direct is the innovative and easy way to manage a company's shares, make new share allotments, record share transfers and more.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.