Law guide: Business start-up

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Members of a company and shareholders

Members of a company and shareholders

Company members and shareholders

The shareholders ('members') of a company are its investors and are entitled to certain rights. The members' liability is limited to the agreed price of their shares.

Therefore, if a member buys 100 £1 shares in a company that later becomes insolvent, owing millions of pounds to its creditors, the worst that can happen to the member is that they lose the £100 they invested. This is because the company is a legal entity in its own right and any debts the company owes are its responsibility and not the responsibility of any individuals involved in it.

While the directors make day-to-day decisions about the company, major decisions are usually dealt with by members passing resolutions in their general meetings (see Shareholder meetings for more information). The law states that only members can carry out certain acts, including:

  • Changing the company's name
  • Removing a director from office
  • Changing the company's articles of association (the company's set of rules)
  • Authorising a service contract for a director, which gives them job security for more than 2 years

Minority shareholders

Those members of a company who hold 50% or less of the company's shares have little power within the company as they can't be certain of passing any resolutions at a members' general meeting.

However, the law gives some rights to these shareholders, including the following:

Rights of a shareholder with any number of shares

  • To have the company wound up: any member of a company can petition to have the company wound up.

Rights of shareholders with at least 5% of the shares of the company

  • To call a general meeting.
  • To have an item placed on the agenda for an annual general meeting, and right to circulate a written statement about a proposed resolution to be voted on at a general meeting: both of these rights are available to holders of at least 5% of the voting rights for that meeting or at least 100 members holding on average £100 of paid-up capital.
  • To circulate a written resolution and accompanying statement.
  • To prevent deemed re-appointment of an auditor: members holding at least 5% can serve a notice on the company to do this (see Company secretary and Auditors).

Rights of shareholders with at least 10% of the shares of the company

  • To call for a poll vote at a general meeting: holders of at least 10% of the company's shares can call for a poll vote. In a poll vote, the shareholders have one vote per share, rather than one vote per shareholder (which would apply to a vote by show of hands).
  • To require an audit where the company would otherwise be exempt.

Rights of shareholders with over 10% of the shares of the company

  • To refuse to consent to short notice for a general meeting: a general meeting needs 14 clear days' notice unless 90% of the members of a private company agree to shorter notice. Members holding more than 10% of the voting shares can therefore withhold their consent and prevent a general meeting being held on shorter notice. Note that the company's articles can be changed to increase the percentage of members who need to agree to up to 95%)

Rights of shareholders with over 25% of the shares of the company

  • To block a special resolution: members holding more than 25% of the company's shares can block the passing of a special resolution.

Related services

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  • Shareholders agreement
    Compatible region(s): England Wales

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