In the UK financial sector, understanding shareholder rights and responsibilities is key to fostering a symbiotic relationship between investors and corporations. It can help individuals navigate the intricate balance of power, accountability and ethical conduct within the financial domain, ultimately facilitating the growth and success of a company.
Who Are the Shareholders?
As the name suggests, shareholders are individuals or entities that own shares or equity in a company. By holding shares, they become partial owners of that company and, as a result, have certain rights and privileges. Shareholders provide capital to the company through their investments. In return, they typically aim to benefit from the company’s profitability and potential appreciation in the value of their shares.
Shareholders vs company directors
While shareholders collectively own a company, the responsibility for its daily operations lies with the directors. This distinction is crucial in understanding the balance between ownership and control within a company. Shareholders exert influence primarily through their rights, notably through voting on critical matters such as director elections, which occur at annual meetings.
The legal basis for shareholder rights
Shareholders’ rights find their roots primarily in the Companies Act 2006, forming the bedrock of their influence over significant company decisions. However, these rights are not static. They can be tailored by the company’s articles of association, a shareholders’ agreement and the terms of specific share issues.
Furthermore, the nature of these rights can vary based on the class or type of shares held, with certain rights reserved for shareholders with a specified percentage of shares.
Understanding the difference between shareholder rights and responsibilities
Similar to a contractual obligation or responsibility, shareholders assume a fiduciary commitment to the company when they invest. This implies that they are bound by certain duties and responsibilities. For instance, if shareholders collectively decide to invest in a company, they incur an obligation to act in its best interests. Failure to fulfil this responsibility may subject them to legal consequences.
Conversely, the rights bestowed upon shareholders allow them to demand the fulfilment of responsibilities in their favour or interest. Just as one can petition a court to enforce a contractual obligation, so shareholders can leverage their rights to ensure the company adheres to sound governance and ethical practices.
For example, shareholders have the right to vote on significant company decisions, providing a mechanism to influence its direction. If the company neglects its obligations or acts contrary to shareholders’ interests, their rights empower them to seek legal recourse.
The Basic Rights of Shareholders in the UK
Shareholders are endowed with a set of fundamental rights that underscore their position as stakeholders in a company. These rights serve as the foundation of shareholder influence and engagement, ensuring an even playing field in the corporate decision-making process.
1. Attend general meetings and vote
UK shareholders enjoy the right to attend the company’s general meetings, providing a direct avenue for participation in crucial decision-making processes. One of the primary manifestations of this right is the ability to cast votes on significant issues, including the election of directors, approval of financial statements and strategic decisions that impact the company’s direction.
2. Receive a share of profits
As company owners, shareholders are entitled to a share of the profits generated. This financial entitlement, often realised through dividends, is a tangible return on their investment and a key motivator for shareholders to continue supporting the company.
3. Access to certain company documents
Transparency is vital to good corporate governance, and shareholders have the right to access certain company documents, including financial statements and reports. This enables them to make informed decisions and hold the company accountable should it fail to comply with regulations and ethical practices.
4. Examine statutory books and constitutional documents
To further enhance transparency, the Companies Act 2006 grants shareholders the right to examine the statutory books and constitutional documents of the company, including the following:
- Register of Members
- Terms of directors’ service agreements
- Terms of directors’ indemnity provisions
- Records of resolutions and minutes of general meetings
This access allows them to delve into the company’s organisational structure, governance framework, and historical records, fostering a comprehensive understanding of its journey and structure.
5. Final distribution on the winding-up of the company
In the event of the company’s winding-up or liquidation, shareholders have the right to a portion of the remaining assets after creditors have been satisfied, usually in proportion to the percentage of shares they own. This final distribution will reflect the residual value attributable to each shareholder, marking the conclusion of their financial stake in the company.
6. Pre-emption on purchase when issuing new shares
To maintain equity among existing shareholders, the right of pre-emption comes into play when a company issues new shares. Shareholders have the first opportunity to either purchase or refuse these new shares in proportion to their existing holdings. This mechanism safeguards existing shareholders from dilution and ensures a fair distribution of ownership.
Upholding Shareholder Responsibilities
While shareholders have their fair share of rights, they must also fulfil specific duties and responsibilities to ensure fairness, regulatory compliance, and sound and ethical corporate governance.
1. Limited duties and responsibilities
Compared to company directors, UK shareholders face few restrictions regarding their shareholding. Generally, they have the freedom to exercise voting rights in their own interest, with exceptions relating to specific circumstances, such as amending articles of association or voting on transactions involving a controlling shareholder. Furthermore, shareholders are not bound by fiduciary duties towards the company or fellow shareholders.
2. Notification of interests
The Disclosure and Transparency Rules (DTRs) stipulate that it is the responsibility of shareholders to notify the company and relevant authorities of any acquisition of shares. Shareholders are mandated to provide notice within two trading days if their aggregate voting rights reach or exceed 3% in a UK company covered by DTR 5. Furthermore, to ensure transparency, ongoing notifications are required for any subsequent changes in percentage holdings above 3%.
3. Relationship agreement for controlling shareholders
In instances where premium-listed companies have a “controlling shareholder”, the Listing Rules impose a mandatory requirement for a relationship agreement which ensures that the controlling shareholder adheres to legally binding undertakings outlined in the Listing Rules. This mechanism promotes accountability and transparency, safeguarding the interests of minority shareholders and upholding the integrity of the premium listing framework.
4. Compliance with regulations and market guidance
Shareholders must comply with relevant laws, notably the Governance Code and the UK Stewardship Code. These documents, published by the Financial Reporting Council (FRC) in 2020, outline good practices for institutional investors.
In accordance with shareholder rights and responsibilities, shareholders are also expected to adhere to institutional investor guidelines, engage effectively with boards of listed companies and follow the principles outlined in the Stewardship Code on a “comply or explain” basis. This commitment ensures a standardised approach to governance and fosters a climate of responsible shareholder stewardship.
A clear grasp of the rights and responsibilities of shareholders is vital in fostering a cooperative relationship between investors and corporations. Serving as a guide, this understanding can help ensure the balance of power, accountability and ethical conduct within a company.
At BEB, we can help you draft a shareholders’ agreement that will enable stakeholders to protect their rights and fulfil their responsibilities. Contact us today and we will discuss how we can provide tailored solutions to satisfy your unique requirements.