A shareholder, also referred to as a ‘member’, is a person or corporate entity with shares in a company limited by shares. Shares can be gained by being a shareholder in a private limited company (Ltd) or purchased by investing in a public limited company (PLC). By holding shares, a shareholder becomes an owner of a portion of the company, giving them certain legal rights. The larger the percentage of the overall shares held in a company, the greater the shareholding. In turn, the greater the shareholding in a company, the larger the percentage of profits that that can be received.Â
In this article, we will look in detail at the role of shareholders in UK companies, the types of shares they may hold, and the legal implications of shareholding in a limited company.
Shareholders legally own a share of a company limited by shares. It might be that a person owns a fraction of a single share, 100% of the company, or somewhere in between. Owning shares grants a shareholder certain rights, such as the ability to vote on key issues like the appointment of directors or changes to the company’s articles of association.
The more shares that a company shareholder owns, the greater their influence over that company. Majority shareholders, those who own more than 50% of the company’s shares, have significant control over decisions, while minority shareholders have much less say.
On a day-to-day basis, shareholders are not expected to contribute to the running of the company unless they are also directors. They do, however, play a key role in helping the company to make decisions by casting votes on ordinary and special resolutions.
Any person or legal entity that is capable of owning shares can be a limited company shareholder. There is no age restriction on who can own shares in a limited company registered under the Companies Act 2006. In addition, shareholders in British companies can be located anywhere in the world.Â
While any person or entity can own shares, some limited companies place specific restrictions within their articles of association or shareholder agreement stipulating who and who cannot be shareholders.
Shareholders can be a minority shareholder, a majority shareholder, or an institutional shareholder. Each type of shareholder has different levels of control and responsibility within the company.
- Minority shareholders – Minority shareholders own less than 50% of shares in a company. They have the statutory right to see the company’s annual accounts directors’ report and, in some cases, management reports throughout the year.Â
- Majority shareholders – Majority shareholders hold more than 50% of the shares in a company. Due to their high shareholding, they have the right to contribute to company decisions.
- Institutional shareholders – Institutional shareholders are not individuals; rather, they are legal entities such as pension funds or investment companies that hold shares in the business.
Company shares have a nominal value and a market value. The nominal value is the original value assigned to each share by the company at the time it is issued, often set at £1.00. This value also indicates the extent of any financial liability of shareholders; in other words, it represents the maximum amount they would need to contribute to the company if required.
The market value of a share reflects the current price that it would fetch if sold. This may be less or more than the original nominal value of the shares. The market value of shares is often referred to as the ‘actual value’. It changes over time based on the company’s performance and broader economic conditions. The difference between the nominal value and the market value is called the ‘share premium’.
There are two main types of shares commonly issued by a limited company in the UK: ordinary shares and preference shares. It is common for companies to create different classes of shares with the specific aim of varying the rights of holders. Ordinary shares, also referred to as common shares, provide holders with company voting rights and dividend payments based on the company’s profitability. If the company is liquidated, ordinary shareholders are the last to receive any remaining capital.
Preference shares differ in that they generally do not have voting rights, but they give preferential treatment to shareholders when dividends are paid out. As such, preference shareholders typically receive dividends before ordinary shareholders, assuming that the company has made sufficient profits available. See below for more details on the rights of different shareholder types.
| Shareholder Rights | Ordinary shareholders | Preference shareholders |
|---|---|---|
|
Voting rights on major company decisions |
Yes |
No |
|
Entitlement to dividends |
Yes |
Yes |
|
Receive capital distribution upon liquidation |
Yes |
Yes |
|
Preferential rights regarding entitlement to dividends and on a winding-up |
No |
Yes |
|
Ability to transfer or sell shares |
Yes |
Yes |
The rights of minority shareholders (those with a shareholding of less than 50%) depend on the percentage of shares/voting rights they hold. Those with at least 5% shareholding have the right to:
- Make an application to the court to prevent the conversion of a public company into a private company
- Call a general meeting
- Require the circulation of a written resolution to shareholders (in private companies) and
- Require the passing of a resolution at an annual general meeting (AGM) of a public company.
Those with a shareholding of at least 10% have the additional right to call for a poll vote on a resolution. Shareholders with more than 10% of a company’s shares have the right to prevent a meeting from being held on short notice (this applies to private companies). At 15% shareholding, they have the right to apply to the court to cancel a variation of class rights, provided those shareholders did not consent to or vote in favour of the variation. And finally, at more than 25% shareholding, shareholders have the right to prevent the passing of a special resolution.
Some company shareholders enjoy special rights, including:
- Rights relating to the appointment of company directors.
- A right to be consulted or informed before the company takes a particular action, and
- Weighted voting rights.
Shareholders’ rights can be changed or even waived in some cases in accordance with the Articles of Association. If they are varied or waived, shareholders are still only ever liable to the value of the amount unpaid on their shares. Shareholders can also come to an arrangement with the company and/or between themselves that their rights should be restricted, e.g. certain shares may not allow the holder to vote or receive a dividend.
Shareholders own the company, while directors manage its operations. While these are different roles, a person can hold both positions in the company. Indeed, in most small limited companies, the owner is the director and majority shareholder.Â
- Shareholders – own a portion of the company and vote on significant decisions.
- Directors – oversee daily operations and make decisions on behalf of the company.
Most companies limited by shares are required to issue a minimum of one share. The Companies Act 2006 does not stipulate a maximum number of shares that a company can issue. With that said, a company can set a maximum under a provision called ‘authorised share capital’ in their Articles of Association.Â
There may be limits for older companies, however. Limited companies registered under the Companies Act 1985 were limited by the amount of ‘authorised share capital’ defined in their Memorandum of Association. Authorised share capital refers to the amount of capital that a company is allowed by its shareholders to issue.
Yes, it is possible to share transfers from one person to another. Shareholders can sell or transfer their shares, provided the company’s articles of association allow it. The value of shares may fluctuate depending on the company’s financial health, and the transfer of shares often requires approval from the board of directors or other shareholders.
Before selling or transferring shares, it is important to review the company’s Articles of Association or any shareholder agreements to see if there are any restrictions on transfers.
Company shareholders can enter into a shareholder agreement with one another. Shareholder agreements outline the rights and responsibilities of each shareholder and are most common and useful in limited companies where ownership and management can sometimes become contentious.
Shareholder agreements typically include provisions such as dividend distribution, voting rights, and procedures for transferring shares. The idea of shareholder agreements is to prevent disputes between shareholders and ensure continuous and smooth business operations.
Final words
We hope that this article has helped you to understand the different types of shares available, the legal responsibilities that come with shareholding, and the differences between shareholders and directors. We have also covered the transferring of shares and shareholder agreements. For more information, please see our guide to shareholders’ agreements, the advantages and disadvantages of share capital, and the rights of shareholders in the UK in limited companies.
