Roles & Responsibilities in a Business: Part 1 – Shareholders

Shareholders are individuals or companies that hold the shares of the company and therefore have ownership of the company. Shares and shareholders exist for both Public and Private Limited Companies – this article will focus on Private Limited Companies.

Shareholders can also be directors and/or employees of the company, and it is important that you draw a distinction between these separate roles and ensure that you wear the right ‘hat’ for the job.

This article is part one of a three-part series. To read part two that covers the Roles of Limited Liability Partners, please click here.

Shareholders are individuals or companies who hold shares in a company and therefore have a financial stake in company success. Shareholders’ roles can range from passive investment to active engagement in governance and strategic direction. Shareholders have the power to influence corporate decisions that may shape the company through voting rights and participation in shareholder meetings. However, Shareholders are not responsible for the day-to-day running of the business, which is the role of directors.

Subject to the company’s Articles of Association (Articles) and any Shareholder Agreement, Shareholders can vote to elect or remove directors, approve major transactions, and pass resolutions to amend the company’s Articles.

As mentioned, Shareholders have the right to vote on certain decisions and to share in the profits of the company. This may be achieved through dividend payments or on a share sale, where you may make a return on their initial investment.

1. Right to attend and vote at General Meetings: these meetings allow Shareholders to participate in the decision-making process, such as approving financial statements, voting on corporate actions or electing directors.
2. Right to receive dividends: provided that their share class grants dividend rights, and the company declares them, certain Shareholders have the right to receive dividends. Dividends represent a share of the company’s profits, which are distributed to Shareholders based on their shareholdings. Dividends are not guaranteed, and the declaration and payment of them are subject to the company’s financial performance and the discretion of the Directors.
3. Right to transfer shares: subject to the Articles and any Shareholders Agreement, plus any restrictions imposed by the Companies Act 2006, Shareholders have the right to transfer shares to others and therefore realise the value of their investment.
4. Right to inspect company records and accounts: this allows Shareholders to access relevant information about the company’s financial performance, decision-making process and operations.
5. Right to appoint or remove directors: subject to the Articles and any Shareholders Agreement, Shareholders can appoint or remove directors. This is to ensure that the Shareholders can hold the directors, and therefore, the company’s management, accountable for their actions and performance.
6. Right to bring derivative claims: a derivative claim is a claim brought by the Shareholders on behalf of the company. These may be brought against a director (or former director) for issues such as negligence or breach of duty.

There are multiple different share classes that can be owned by Shareholders. Limited companies can create different classes of shares according to the benefits, voting rights and any other conditions they want to assign to different groups of Shareholders. The below are the most common classes of shares:

• Ordinary Shares: this is the standard class of share, which usually has no particular rights attached to them above the rights to receive dividends, to vote and to a return of capital on winding up.
• Preference Shares: these usually do not have any voting rights but have the right to receive dividends before ordinary Shareholders (in the case that distributable profits are not enough to provide dividends to all Shareholders). Preference Shareholders may also have the right to get their capital returned first on a winding up.
• Voting/Non-Voting Shares: certain classes of shareholders may be given extra votes, or alternatively, not be able to vote in company meetings.
• Redeemable Shares: these are shares that can be bought back by the company in the future. These offer the company flexibility to reorganise its capital based on business needs and give these Shareholders an exit path to cash out the returns from their investment.
• Alphabet Shares: Alphabet shares (e.g. ‘A Shares, B Shares etc.) are often used to offer different rights and entitlements to Shareholders without changing the shareholding, such as to preferential dividends, limited rights to vote at General Meetings, or the payment of a dividend in different amounts to each class of shareholder.

Shares may be acquired when the company is initially set up, by creating new shares, or by buying shares from existing shareholders. Share prices are usually set at a low figure of £1 per share.

The total share capital in a company is the total money invested in shares. For example, if there were 100 shares of £1 each, the total share capital would be £100. However, this does not mean that the actual market value of the company is £100.

Shareholder Agreements and the Articles will often provide guidance as to how shares may be valued on a sale, for example, whether they will be valued at their market value and who by. This may depend on the manner in which the shares are being sold and if the Shareholder is departing from the company, and you should take care to carefully read these documents and ensure that you understand any potential implications.

When buying shares, these can be either paid or unpaid by the Shareholders. If they are unpaid, the company will ask the shareholders to pay once the company is being closed or if the company is paying off debts. It is therefore wise to make sure that your shares are fully paid up. Shareholders in limited companies do not have any further financial obligations to the company past any amount unpaid on their shares.

Being a shareholder is a popular method of owning a company, due to the limited financial liability, the control through voting rights and the rights to receive dividends. A Shareholders Agreement will enable you and the other Shareholders to govern decision making, the transfer of shares and decide how any disputes will be resolved in advance. Our corporate team can draft or review Shareholders’ Agreements and/or bespoke Articles for your company and answer any questions you may have. Contact us today and book your free 30-minute consultation.

This article is for informational purposes only and does not constitute legal advice. Individuals should not act upon the information contained in this article without first seeking professional legal and financial (tax) advice.

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