Poor preparation of a company’s constitutional documents can lead to disputes and ultimately the business failing.
Whilst, arguably, the most important shareholding thresholds are:
25%+ (the ability to block special resolutions);
50% (the ability to block ordinary resolutions);
50%+ (the ability to pass ordinary resolutions); and
75% (the ability to pass special resolutions),
there are other thresholds that carry certain rights.
In this article, we will explore some of the rights, risks and obligations that differing percentages carry in a private limited company. References to a percentage are to the percentage of ordinary voting shares and assumes they all rank equally in that regard, i.e. no class of shares carries any additional, or weighted, voting rights.
Gimme Five (Percent)
The normal manner in which a resolution of the members is passed will be where the directors consider a course of action to be in the best interests of the company, but require the members’ approval in order to be able to carry out that action.
They will usually hold a board meeting, resolve to refer the matter to the members, whether that be by way of a written resolution which is sent to the members for them to approve (or otherwise), or by convening a general meeting whereby the members physically meet, and, in either event, if sufficient members indicate their approval, the directors can go ahead.
This is all well and good in an “owner-managed business”, being a business where the directors and the shareholders are one and the same, but there are certain companies where the directors and the shareholders are not the same people, and their opinions on the conduct of the business may differ.
It may be that the members wish to pass a resolution that the directors do not agree with, or have no interest in putting forward. It may be that the resolution in question is to remove a director, in accordance with the members’ statutory right to do so (section 168 of the Companies Act 2006), or to appoint additional directors, which may alter the balance of power in terms of the day to day operation of the company.
Either way, where a shareholder, or group of shareholders, holds 5% or more of the voting rights in a company, they acquire the ability to require the company to circulate written resolutions to all eligible members, or to require the company to convene a general meeting in order that such resolutions may be considered.
Those shareholders may also require the company to circulate a statement relating to the proposed resolutions.
Whilst a well-drafted shareholders’ agreement and set of articles of association cannot remove this right, and in actual fact the articles can make the requisite percentage lower, these documents can provide that certain matters may only be carried out with the approval of a certain percentage of the members, or even by unanimity.
Ten percent, give or take
We have touched upon tag-along and drag-along rights i.e. the right within a shareholders’ agreement or articles to force a minority shareholder to sell their shares to a third party as part of a sale, or the right for a minority shareholder to come along for the ride.
There are actually provisions within the Companies Act 2006 which could be described as statutory drag-drag along, or “squeeze-out” (sections 979 to 982), and also statutory tag-along, or “sell-out” (sections 983 to 985), but only where the relevant minority shareholder(s) hold 10% or less.
They essentially provide that, where a third party i.e. not an existing shareholder or an associate of an existing shareholder, acquires or unconditionally agrees to acquire not less than 90% of the shares in the capital of a company, one of two things can happen.
Either, the person acquiring the shares can compel the minority shareholder to sell their shares, or the minority shareholder can compel the person acquiring the shares to acquire theirs at the same time.
This can create a level of uncertainty for everyone involved, especially given that these provisions are hidden away towards the end of the Companies Act, and further as the statutory process is far from simple. All the more reason to ensure clear and concise provisions are included within a bespoke shareholders’ agreement and articles of association.
At 10% or more, a shareholder or group of shareholders can require a poll vote, as opposed to a show of hands, meaning that the percentage levels are taken into account at a general meeting. This becomes less relevant as more private companies utilise the written resolution route, which utilises a poll vote in any event.
Further, and useful for a shareholder or group of shareholders with the desire of causing expense and inconvenience for a company, a shareholder or group of shareholders holding 10% of the issued share capital in a company, or of any class of shares, can cause a company to require an audit.
Small companies (as defined within the Companies Act 2006) are exempt from the requirement to have audited accounts, which are much more in depth, and significantly more expensive to prepare.
If you need guidance on corporate matters, please contact us for an informal chat.