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Reservation for Two. Making sure everyone gets a seat at the table

Over a series of articles Oliver King examines some of the traps and pitfalls of operating within a private limited company structure without the protection of either a shareholders’ agreement or bespoke articles of association. Poor preparation of a company’s constitutional documents can lead to disputes and ultimately the business failing.

In a previous article I discussed different aspects of a company’s operation that are undertaken by the directors, and others which tend to be undertaken only with the consent of a given percentage of the shareholders.

Depending on the decision in question, this will either be a simple majority of the shareholders (an ordinary resolution) or with the approval of 75% of the shareholders (a special resolution).

Generally speaking, special resolutions are those which have a greater impact on the operation of the company, and include changing the company’s name, amending the articles of association and dis-applying other shareholders’ rights to participate in the issue of fresh shares, amongst other things.

Whilst there are remedies for a minority shareholder whose position is unfairly prejudiced by the majority shareholder(s), these can be very expensive and complex, and fall outside of the scope of these articles. Besides, prevention is always better than a cure.

In instances where there is either a shareholder, or a group of shareholders, with greater than 50% of the issued share capital, it is especially important to have a shareholders’ agreement in place, as these will often include a list of reserved matters, or decisions which can only be taken with the prior consent of a given percentage of the shareholders. In companies where there are many shareholders with varying percentages of shares, this may be a fixed percentage, but where there are only two shareholders with different shareholdings, it may be that these decisions can only be taken with the prior consent of both shareholders.

Alternatively, there may be different thresholds for different decisions; a given percentage for decisions which will not have as severe an impact on the minority shareholders, and unanimity on those which would.

Such reserved matters are often included in a shareholders’ agreement, as opposed to the company’s articles, as they may be of a more commercially sensitive nature. As mentioned in the earlier piece regarding the transfer of shares, acting in breach of these provisions could be a triggering event for the compulsory sale of shares by a defaulting shareholder.

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