How Should I Protect My Position as A Minority Shareholder - Shareholder agreements

The best way to protect minority shareholders is to save their being any dispute at all. Sounds easy, right? Well actually, it can be; that is if you regulate relations between shareholders by way of a shareholders agreement. Investing time and money into creating a well-drafted, properly documented shareholders agreement minimises the risk to your business in the longer term.

By minimising risk, you create protection for all involved. Minority shareholders can be protected through a variety of carefully drafted provisions in a shareholders agreement. These include:

1.  Voting Rights

A shareholders agreement contain provisions that dictate how decisions are made among shareholders. It is commonly assumed that the individual or entity who 50% of the voting rights would be the norm for making decisions. A situation such as this could provide risk to the minority shareholder in that they may not have a meaningful say in the direction of travel of the company.

Assuming the common rationale of 50% of the voting rights being the requisite to pass a decision in our hypothetical company, X Limited, W could force through any decision that they wished to make. This would mean that Y and Z would have little say in the decision making process.

This situation could have been avoided had W, Y and Z sat down at the outset of the business’ beginning and agreed on a decision making process, and documented this decision by way of a voting rights provision in the shareholders agreement.  For example, a shareholders agreement could contain a requirement that specified key decisions are approved by what is known as a “special majority”. A special majority could require: unanimity, more than 75% of the voting rights or some other percentage greater than 50% or by a named party. This would protect Y and Z in that they could now affect the decision making process given that together, they hold 49% of the voting rights in X Limited.

2. Control the transfer of shares

 Minority shareholders may wish to be protected by having control over who is admitted as a shareholder in the company. A Shareholders’ Agreement can include the right of pre-emption whereby any shareholder wishing to sell their shares must first give the remaining shareholders, or the company, the right of first refusal on those shares.

Pre-emption rights are also a useful protection mechanism for small companies as they may wish for the initial shareholders to retain their share of the company, preventing external/unknown individuals becoming part of the business.

3. Transmission of shares

A Shareholders’ Agreement has the ability to dictate how shares are transferred in the event of the death of a shareholder. For example, a provision can be drafted in the shareholders agreement which dictates that in the event of a death of a shareholder, the company will be provided with sufficient funds to purchase the deceased shareholding as opposed to allowing the deceased’s beneficiaries to inherit the shares and therefore have involvement or a say in a company they may have little knowledge of.

4. Anti-dilution provisions

 A minority shareholder may wish to protect their interest in the limited company by incorporating anti-dilution provisions into a shareholder agreement. Anti-dilution provisions protect shareholders from their investment becoming less valuable.

An anti-dilution provision would be incorporated to proportionally adjust the number of shares held by a minority shareholder in light of any new allotments. This would mean that the minority shareholders equity position and standing in the company would be preserved in the event that a majority shareholder wanted to pursue a new allotment of shares at their own will.

Conclusion

The best way to protect minority shareholders is to regulate problems before they arise. A well drafted, clear and concise shareholder agreement is in the interests of all parties. They provide a roadmap for resolving disputes and regulating relations between the shareholders, saving save time and money in the long term. At Gilson Gray, the Corporate team are on hand to provide bespoke advice on a shareholder agreement that meets the needs of your business.

Read Part 1 of the ‘How Should I Protect My Position as A Minority Shareholder’ series here.

Read Part 2 of the ‘How Should I Protect My Position as A Minority Shareholder – Directors Duties’ series here.

Read Part 3 of the ‘How Should I Protect My Position as A Minority Shareholder – Court Actions’ series here.

For more information on the above please contact Oliver Craig, Trainee Solicitor, email  OCraig@gilsongray.co.uk / +44 (0)141 286 2017 or Craig Darling, Partner – Corporate Law, email cdarling@gilsongray.co.uk/ +44 (0)141 530 2044