Your complete guide to protecting minority shareholder rights

What is a minority shareholder?

A minority shareholder is someone who holds shares in a company, but not enough shares to pass decisions about the company on its own.

Expert guide to protecting minority shareholder rights

1. Understand your rights

To be able to protect your rights as a minority shareholder, it is essential to have a clear understanding of the rights granted to you by law and the company's documents (e.g. articles of association and shareholders agreement).

You should familiarise yourself with the company's articles of association and its shareholder agreements, so that you have a clear oversight about your rights. Key rights typically include the right to information, voting rights, and dividend entitlements. You may also have other rights that are specifically designed for protecting minority shareholders, such as tag-along rights (find out more about these types of rights here).

2. Document your rights

You should ensure that you are a party to the company’s shareholders agreement and that the shareholders' agreement has been drafted in a way that is fair to all shareholders, whether majority or minority.

Clauses can be included that are specifically aimed at protecting minority shareholders, including:

1. Pre-emption rights - Including pre-emption rights in a shareholders agreement (or articles of association) 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 (including minority shareholders) on the same terms as it would to any new shareholder. It gives those shareholders the option to purchase the shares before they are offered to third parties. More information about pre-emption rights can be found here.

2. Reserved matters - The main purpose of a shareholders' agreement is to regulate the relationship between shareholders of a company. This is done specifically, by setting out a list of 'reserved matters' that cannot be implemented without the consent of a specified percentage of a company's shareholders (or all shareholders). This could include, for example, (i) altering the name of the company or its registered office; (ii) entering into any arrangement, contract or transaction outside the normal course of the company’s business or otherwise than on arm's length terms; (iii) making any borrowing other than from the company’s bankers in the ordinary and usual course of business; or (iv) appointing or changing the auditors of the company or changing the financial year end. Including reserved matters in a shareholders agreement means that the majority shareholders are not able to just run the company as they please and provides some protection for the minority shareholders, as they have a say in those reserved matters.

3. Tag-along rights - "Tag along" rights are intended to protect minority shareholders so that, if a majority shareholder sells their shares in the company, the minority shareholder has the right to join the transaction and also sell their shares in the company. More information about tag-along rights can be found here.

4. Rights to appoint directors - you can specify in the agreement which shareholders have the right to appoint a director to the board. Giving a shareholder this right can be a key tool in protecting minority shareholders' rights.

To find out more about shareholder agreements, read this comprehensive guide.

3. Do your due diligence before buying shares in a company

Before investing in a company in return for shares in that company, you should make sure that you conduct thorough due diligence to assess the company's financial health, governance practices, and treatment of other minority shareholders. You should look out for any signs of unfair treatment towards minority shareholders, such as related-party transactions or instances of majority shareholder abuse. You should also carefully review any company documents (such as articles of association and shareholder agreements) to ensure that they include provisions designed for protecting minority shareholders.

4. Play an active role in the company

Just because you are a minority shareholder, does not mean that you should play a passive role in company decisions. Participating in shareholder meetings and exercising your voting rights is a powerful way to protect your interests.

5. Work collaboratively with other shareholders

Developing relationships with other shareholders, both minority and majority, can be key to strengthening your position as a minority shareholder. Collaborating with like-minded shareholders can help to improve transparency, fairness, and governance practices within the company.

How can Docue help with protecting minority shareholders?

Docue’s shareholder agreement template can be a key tool for protecting minority shareholders’ rights. It includes clauses to protect all shareholders, whether minority or majority in their shareholders. It also includes the option to include clauses that are specifically designed for protecting minority shareholders, such as tag-along rights.

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