What rights does a shareholder have in the way a company is run? What can shareholders do if they do not like what the directors are doing?
Companies are owned by their shareholders but are run by their directors. The directors make most of the decisions of the company: the major strategic ones as well as the day-to-day ones.
However, shareholders do have some power over the directors although, to exercise this power, shareholders with more that 50% of the voting powers must vote in favour of taking such action at a general meeting.
One of the main powers that the shareholders have is to remove a director or directors. The shareholders do not need a reason for this and there is no need to prove that the director was acting wrongfully; all it takes is for more than 50% of the shareholders to vote at a general meeting to remove the director or directors. There are however procedures that must be followed when calling the meeting.
At a general meeting, the shareholders can also pass a resolution telling the directors how they must act when it comes to a particular matter. If this is done, the directors must then take the action that the shareholders have decided upon.
Whilst the most significant powers the shareholders have over directors must be exercised by at least 50% of shareholder votes, minority shareholders do some, although more limited, powers. For this reason, it is always best for a minority shareholder to first try to get the support of other shareholders so that those with more than 50% of the shareholding powers can act together.
For more information of the specific powers of minority shareholders, see this blog I wrote earlier.
Court action can be taken by a minority shareholder if they can prove that they are being unfairly prejudiced by the way the directors are running the company. This is particularly useful when a company is being run in such a way that to benefit the directors at the expense of the shareholders. Each situation is unique and so it is difficult to give general advice is to what circumstances would allow the shareholders to take this type of action.
Some examples however are directors:
- paying themselves excessive salaries or bonuses and therefore reducing the profits of the company and the dividend payable to shareholders;
- failing to pay dividends to some shareholders that are entitled to them;
- entering into transactions that benefit the directors personally at the expense of some shareholders;
- refinancing the company in such a way that benefits the majority shareholders and harms the minority shareholders;
- transferring the company’s assets to another company for less than they are objectively worth;
- offering the company’s assets as security for debts of the majority shareholders or directors;
- starting another company that is in competition with the company so that it ultimately benefits the directors at the expense of the shareholders.
If you are a minority shareholder and are unhappy with the way the directors are running the company, get in touch for an informal chat about what you could do to safeguard your position.