An analysis of your shareholding in a private limited company is not as simple as percentage held equals proportion of power. There are key thresholds which must be borne in mind when gauging how much power a shareholder really wields in a company.
75%: a powerful percentage to hold, whether this be you or you combined with like-minded shareholders. With this shareholding, you can pass special resolutions, necessary to approve a proposal to, for example: amend the articles of association, change the company’s name, wind the company up, authorise the company to issue new shares without having to offer them to existing shareholders first (pre-emption rights), and allow the company to buy back its own shares out of capital.
Over 50%: With a majority holding, you can pass ordinary resolutions, required to approve proposals including: appointing or removing directors, allowing the company to buy back its own shares (other than out of capital, where a special resolution is required), authorising the directors to allot shares (unless there is only one class of share, in which case the resolution will not be needed), and approving loans to or substantial property transactions with directors.
Over 25%: As expected, a majority shareholding puts the holder in strong position. Do not underestimate however the strength of holding over one quarter of the share capital. With this you can block special resolutions (which require approval of the holders of 75% or more of the share capital).
The 75% shareholding and the majority shareholding are the famous thresholds in company law, and not without reason. Once a shareholder’s percentage is below the quarter mark, his or her power diminishes significantly. The law provides for certain protections for minority shareholders, and there are important sub-25% thresholds to note as well.
15%: entitles you to apply to the court to object to the variation of a company’s shares’ class rights (where there is more than one class of share) even if the variation has been approved by a special resolution of that class.10%: allows you to demand that a vote at a general meeting be held on a poll basis (one share equals one vote), rather than a show of hands (where one shareholder gets one vote). A shareholding of over 10% also affords you some protection in the event that an offer has been made to buy the company. The purchaser’s position is much stronger as against the minority shareholder if they can acquire 90% or more of the shares. Subject to any other relevant agreements and minority member remedies, the minority shareholder may have no choice but to sell as well.
5%: allows you to requisition a general meeting of the company.
As always, governance of a particular company does not end with the legislation. Articles of association and shareholders’ agreements will make specific provisions for shareholder rights. For example, holders of a particular class of share may want the right to appoint their own director to the board; and companies may wish to lower the threshold at which minority shareholders must sell their shares to a purchaser acquiring the other shares in the company (so-called ‘drag-along’ rights; along with their equivalent where minority shareholders will want to have their shares bought by a purchaser – ‘tag-along’ rights). Alongside any contractual provisions or provisions in the constitution of the company, shareholders should be aware of their statutory rights and note that it is not all or nothing when it comes to voting on their company’s affairs.
Please contact Harry Perrin if you would like to discuss any of the issues raised in this article.
The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 21 October 2014. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, October 2014.