Understanding shareholders responsibilities - what are the key duties of shareholders in limited companies?

Who can be a shareholder of a limited company?

A shareholder (sometimes known as a “member” of a company) is someone who owns part of a company via shares. They can be either:

• individuals; or

• corporate entities (e.g. other companies).

Where are key shareholder responsibilities / duties of shareholders found?

Duties of shareholders, as well as the powers they have, can typically be found in three places:

1. Company law - for companies registered in England and Wales, UK company law imposes little by way of active duties or liabilities on shareholders. Limited companies are structured in a way that limits the liability of shareholders so that shareholders are distinct from the company itself (in contrast to sole trader businesses). Shareholders do not therefore hold fiduciary duties to the company or to the other shareholders. The Companies Act 2006 does, however, reserve certain decision making powers to shareholders - find out more about these below;

2. Articles of association - Articles are a limited company’s main constitutional document. They set out the rights, powers and responsibilities of a company, its shareholders and directors. Articles will set out rules about shareholders’ decision-making, including how they can and will make decisions (e.g. processes for general meetings and how disputes are dealt with); and

3. Shareholder agreement- A shareholders agreement is an agreement between a company and its shareholders that sets out the duties of shareholders, as well as their rights, in relation to the company. More information about shareholders' agreements can be found here.

Where are the key shareholder responsibilities / duties of shareholders?

So, the above list is where the duties of shareholders can typically be found. But what do those shareholders' responsibilities tend to include?

1. Investment - although obvious, a key aspect of becoming a shareholder in a company is providing monetary investment in return for shares. Raising funds from shareholders can be key to growing a company;

2. Voting - one of the most important duties of shareholders is to attend general meetings and vote on company matters (or vote by passing written resolutions). Certain decisions of a company which are fundamental (for example, the issue of new shares in the company) often require the approval of the company’s shareholders. This is required by company law in the UK (the Companies Act 2006) but can also be governed by a company’s articles of association, shareholders’ agreement or other investment agreements. Shareholders are free to exercise their voting rights as they please and to advance their own interests, except when they are prevented from doing so because of an interest in a proposed transaction or if, in relation to a proposed change to the company's constitution, it is not voting bona fide in the interests of the company.

3. Reserved Matters - some matters are “reserved” to shareholders to vote on and cannot be decided by the company’s board of directors. Shareholders have a duty to decide on these matters - it could include, for example, issuing new shares, the disapplication of pre-emption rights, the subdivision of shares, a change of company name or winding up the company.

What happens if shareholders responsibilities are not fulfilled?

If a shareholder breaches its duties under a shareholders agreement, the company and/or the other shareholders could bring a claim for breach of contract against the defaulting shareholder. If they have suffered a loss as a result of the defaulting shareholder’s actions, they may be able to bring a claim for damages against that shareholder. To avoid this situation, it is important to know exactly what duties of shareholders are included in your shareholder agreement.

What is a person with significant control (PSC)?

A shareholder may also be a person with significant control (PSC) in a company. A PSC is someone who has:

• more than 25% of shares in the company;

• more than 25% of voting rights in the company; or

• the right to appoint or remove the majority of the board of directors.

A company is required to notify Companies House of all of its PSCs - to do this it must request certain information from the PSC. If you think your company has a PSC, but you do not have all their information, you should send them a notice requesting this information and confirmation. Anyone who does not respond to these notices within one calendar month, or gives false information, commits a criminal offence. They could receive a 2-year prison sentence, a fine or both.

You must also notify Companies House of any changes to the information about PSCs within 14 days of any such change occurring.

What is the difference between a shareholder and a director?

It is possible for someone to be both a shareholder and director of a company. Directors are responsible for the day-to-day running of the company, and have a number of statutory duties they must comply with. If someone is both a shareholder and a director, it is therefore really important to understand both their shareholder responsibilities and directors' duties. Find out more about directors' duties here.

How can Docue help shareholders understand their duties and responsibilities?

Well-drafted shareholders' agreements and articles of association can be key to ensuring that shareholders know exactly what shareholders' responsibilities they are subject to. Docue’s template shareholders agreement can be easily customised to meet your needs, so that you know exactly what duties of shareholders there are.

Sign up to Docue today to use our shareholders' agreement template.