What do you need to include in a shareholders agreement to protect majority shareholders rights? Find out here
What is a majority shareholder?
A majority shareholder is someone who holds a high percentage of shares in a company, and such a percentage enables it to make decisions about the company.
Under UK company law, the required majority for decision-making by a company’s shareholders (also known as members) depends on the type of resolution required for that particular decision:
For an ordinary resolution, the required majority is a simple majority (i.e. 51%) of the total voting rights of eligible members; and
For a special resolution, it is 75% of the total voting rights of eligible members.
What to include in a shareholders agreement to protect majority shareholder rights?
A shareholders agreement is an agreement between the shareholders of a company, that sets out the shareholders' rights in relation to the company, how the company will be governed and the overall relationship between the company and its shareholders.
But what are the key clauses to include to protect majority shareholder rights?
1. Dividend payment mechanism
Majority shareholders will often have made a significant capital contribution in respect of the shares they own. A clause should therefore be included that outlines the procedures for distributing profits or dividends to shareholders. The clause should specify how and when the company will distribute profits (via dividends) to the shareholders. It will set out how dividends will be calculated so that there is a clear process in place e.g. whether it will be based on profits or other financial metrics. A dividends clause is an important aspect of an agreement between shareholders as it provides clarity and transparency regarding how the company plans to distribute profits to its shareholders.
2. Board control
Majority shareholders may want to protect their rights by ensuring they maintain control over the company’s board. For example, a clause could be included in a shareholders agreement that states that only shareholders with shareholdings over a certain percentage have rights in relation to directors (e.g. appointing and removing them from the company’s board).
3. Drag-along rights
This is an important type of majority shareholder rights. "Drag along" rights are used when a majority shareholder is selling their shares in a company. "Drag-along" rights force the minority shareholders to accept whatever deal is negotiated by the majority shareholders, and also sell their shares, therefore protecting a majority shareholder's rights to sell its shares on favourable terms. Find out more about drag along rights by reading this guide.
4. Pre-emptive rights
Pre-emptive rights give a shareholder rights to buy newly issued shares, or shares being transferred, before a third party has the chance to buy them. There are two types of pre-emption rights clauses:
Transfer of shares - including these types of clauses means that, where a shareholder wants to transfer its shares, it must first notify the company of its intention to do so to enable the company to offer those shares to the other shareholders on the same terms as it would to any new shareholder.
Issue of shares - including these types of clauses means that, where the company proposes to allot any new shares, it must first offer those shares to the other shareholders on the same terms as it would to any new shareholder.
Find out more about pre-emptive rights by reading these frequently asked questions.
5. Dispute resolution mechanism
A clause should be included that includes a clear mechanism for dispute resolution, so that if things do go wrong there is a firm process in place to try and fix them, without damaging the company or each shareholder’s rights.
How can Docue help with protecting the rights of a majority shareholder?
Docue’s shareholders' agreement template includes the option to include the clauses listed above, plus many more, in order to protect majority shareholder rights. Docue’s platform will take you through a series of questions and update your document in real-time based on the answers given. There are lawyer-drafted guidance notes throughout the questions to help you along the way, so that you have a fully customised shareholders agreement in no time at all.
Sign up to Docue today to use our shareholders' agreement template to protect majority shareholders' rights.
Tags: majority shareholder rights, capital contributions, rights of a majority shareholder, majority shareholder uk.
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