Shares are a serious business

Owning shares in a private company will give you rights, but what exactly?  Here Steven Grant, Commercial Partner at Warner Goodman Commercial, answers some of the most common questions asked by shareholders, and why these may be of particular importance today.

The majority of questions that come from shareholders focus around a few key areas; working with other shareholders in the business, your personal rights as a shareholder, and selling your shares.

Ownership does not always mean control.  The directors, rather than shareholders, have day to day control of the company’s affairs.  A shareholders’ agreement and special Articles can give you rights you wouldn’t otherwise have, however if you would like more say by becoming a Director, again this depends on the Articles.  They might allow the existing directors to choose and appoint new directors.  Normally however, a majority shareholder will have a right to appoint themselves as a director, and remove the others.  For this reason someone owning more than 50% of the voting shares will normally have ultimate control.

Shareholders in the same company may have different rights.  A company can have different classes of share, each with different rights such as the right to receive dividends, or the right to vote.  On the one hand this gives flexibility; on the other it can create tension or even confusion.

In terms of financial rights, it is important to distinguish between income and capital.  If you can afford to, it may be best to draw a minimal salary or dividend and leave the rest in the company to take advantage of favourable tax reliefs when, and if, you sell the company.

It’s also important to be prepared.  If one of the key shareholders passes away, by default shares would normally pass under a will or under the laws of intestacy.  To protect the company, fellow shareholders, and their loved ones, an option agreement should be in place which allows the ongoing shareholders to buy the shares for a pre-agreed price.  This can be backed-up with insurance, with the proceeds being used to pay for the shares.

Aside from rights, shareholders should not lose sight of their responsibilities, especially if the company faces going bust. In a limited liability company your liability tends to be restricted to the amount unpaid on your shares, which is often nil.  However, you may have given personal guarantees, commonly to a bank or under a lease.  Directors on the other hand may be personally liable in certain circumstances so they, along with shareholders, should take legal advice as soon as possible to assess and limit their risk.

There may come a time when you wish to sell your shares, and with this comes a whole range of questions in itself.

A company’s value will fluctuate over time, and with it the value of your shares.  Shares can be valued using various different methods and formulas, such as the sector in which the company trades, and its potential future and historic trading records.  The company’s Articles may influence who you can sell your shares to, at what time you can sell them, and the contentious issue of whether you can be forced to sell.  Restrictions and rights of first refusal can be implemented to avoid sales to undesirables, and restricting sales within the first few years of a company’s life can provide stability.

If you are faced with the situation that you feel you are being forced to sell your shares, remember that generally this isn’t allowed.  However, the Articles or shareholders’ agreements can specify circumstances where this can happen.  Usually these include where a shareholder is no longer an employee or director, becomes bankrupt or is convicted of a serious criminal offence.

If you’re a shareholder and have got any other questions, or would like more information on being a shareholder, then contact Steve or the Warner Goodman Commercial Team on 02380 717717 or visit their section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.