In the complex and often volatile landscape of small businesses, a nuanced understanding of shareholder rights is important. This article aims to cover five of the most important issues for shareholders in small businesses based in the UK. It focuses on critical rights and responsibilities that are often either misunderstood or entirely overlooked.
The Power of ‘Put Options’ for Minority Shareholders
In the volatile world of joint ventures and small businesses, minority shareholders frequently find themselves in a vulnerable position. The concept of a ‘put option’ can be a strategic game-changer in such scenarios. This contractual provision allows a minority shareholder to compel the majority shareholder to buy their shares under specific, pre-agreed conditions. For example, in a tech startup where one party owns 70% and another owns 30%, if the majority shareholder decides to pivot the business model, the minority shareholder may disagree but lack the voting power to prevent it. A well-drafted put option can offer an exit strategy, allowing the minority shareholder to sell their shares at a pre-determined price, often calculated through an independent valuation.
The Role of Quorum in Decision-Making
The concept of a quorum may be seen as a cornerstone of democratic decision-making within a company. Take the example of a General Practitioner (GP) partnership where one partner owns 60% and two other partners own 20% each; the articles of association might stipulate that a quorum requires the presence of shareholders representing at least 50% of the voting shares. In this case, the minority shareholders can wield significant influence by ensuring they are part of the quorum. Their presence or absence can tip the scales in critical decisions, from business expansions to mergers or even dissolutions.
The Indispensable Role of Shareholder Agreements
Shareholder agreements form the indispensable framework that defines the rights, responsibilities, and protections for each shareholder. These agreements can include clauses like ‘tag-along’ rights, which are particularly beneficial for minority shareholders. At Nath Solicitors, we have thirty years of experience drafting and perfecting these agreements and have experienced several instances in which our clients’ interests were protected during shareholders’ disputes because of the watertight clauses we had placed in the agreements. It is difficult to understate how important it can be to get these documents right. It is equally essential that you use a professional whose work you can rely on. Should you require such a service, reach out to our dedicated team on 0203 983 8278.
The Right to Call a General Meeting
The Companies Act in the UK empowers shareholders holding at least 5% of the voting rights to call a general meeting. This right is not just theoretical, but a practical tool for minority shareholders to instigate change. For example, if a GP partnership’s majority shareholder is neglecting necessary medical equipment upgrades, minority shareholders can call a general meeting to discuss this issue. They can propose resolutions to either compel the majority shareholder to invest in upgrades or to explore external investment opportunities.
Legal Remedies for Unfair Treatment
Minority shareholders should be aware of the legal remedies available to them under the Companies Act 2006, Section 994, which allows for an unfair prejudice claim. For instance, if a majority shareholder is diverting business opportunities to another venture they own, this could be a clear case of unfair prejudice. The minority shareholder could seek remedies that may include a buyout of their shares at a fair price or even an order regulating the company’s future conduct.
FAQs
Q. What is a ‘put option’ in a Joint Venture Agreement?
A. A ‘put option’ is a contractual provision that allows a minority shareholder to sell their shares back to the majority shareholder under specific conditions. This is particularly useful in joint ventures where minority shareholders may feel ‘locked-in’ during disagreements or deadlocks. The option provides an exit strategy, often at a pre-determined price calculated through an agreed-upon formula.
Q. What is a quorum and why is it important in small businesses?
A. A quorum is the minimum number of shareholders required to be present at a meeting for its proceedings to be legally valid. It is crucial for decision-making in small businesses because, without a quorum, no resolutions can be passed. Minority shareholders can influence the quorum and, consequently, the decision-making process. For instance, some shareholder agreements require that minority shareholders must be part of the quorum for specific types of decisions.
Q. What additional contractual protections can minority shareholders seek?
A. Minority shareholders can seek additional protections like quasi-fiduciary duties and liability caps. These are often incorporated into shareholder agreements and offer an extra layer of security. For example, a quasi-fiduciary duty might require majority shareholders to act in the best interest of the company, thereby indirectly protecting minority shareholders.
Q. What does ‘one share, one vote’ mean?
A. The principle of ‘one share, one vote’ means that each share in the company carries one vote in shareholder meetings. This principle is essential for maintaining fairness and preventing power imbalances among shareholders. However, there can be exceptions, such as non-voting shares, which should be clearly outlined in the shareholder agreement.
Q. How can a shareholder make a proposal in a small business?
A. In the UK, shareholders holding at least 5% of the voting rights have the power to call a general meeting and make proposals. This is a formal process and requires adherence to specific legal requirements. The proposal can be about anything from business strategy changes to governance issues. It provides a platform for minority shareholders to voice their concerns and influence the company’s direction.
Comment
Being a minority shareholder in a small business doesn’t relegate you to the role of a silent partner; however, without a voting majority, it becomes far more important that you understand your rights and responsibilities. This blog should give you an idea of some of the tools you may need to navigate the complexities of shareholder rights effectively, as well as giving you an insight into how complex shareholder negotiations can become.
At Nath Solicitors, we advise on all aspects of commercial contracts (including contractual disputes), and have been doing so successfully for many years. If you are entering a new business contract or you are facing issues around contractual performance, contact Shubha Nath on 020 4538 6307 or get in touch with the firm online. We would be more than happy to have an initial chat about your case and how we may be able to help.
