A limited company’s legal beneficial owners are mainly the shareholders. In return for portion ownership in the form of equity shares, these individuals invest money in a company. In return, they have the right to vote on the company's management and overall direction and earn a portion of the profits relative to their ownership percentage.
Shareholders are also liable for paying the value of their outstanding shares if they are unable to pay their creditors, or if otherwise called upon by the directors to do so. One investor can own many small businesses, and that investor is considered as a sole director. Moreover, corporations may have several owners and directors who may or may not be the same individuals.
What kinds of rights and responsibilities do shareholders have?
Investors of a limited company are not interested in the day-to-day running of the corporation unless they are also appointed as directors. They only make decisions when directors have no power to do so.
The rights of shareholders are specified in the prescribed descriptions attached to their shares (Companies Act 2006). Their rights are determined by the quantity and type of shares they hold ("class"). In the articles of association and shareholders ' agreement, the specified descriptions of each share class must be outlined.
The rights and responsibilities of a limited company shareholder are as follows:-
- Getting at least one share in a limited company.
- Agreeing to provide the value of their shares if a company is unable to pay its creditors. This is known as limited liability.
- Right to change the company name
- Right to change the company structure
- Allowing rights and powers to company directors
- Issuing more shares after company formation
- Transferring shares to other people.
- Appointing and removing directors
- The rights which are all attached to shares should be changed in prescribed particulars.
- Receiving company profits (dividends payments) with the number and value of their shares.
- Approving substantial investments
Following are the rights attached to ordinary shares
Most of the new companies issue ordinary shares. Each one carries the same rights, including:
- Right to dividends (a share of business profits)
- Right to direct one vote at general meetings
- Right to get a distribution of remaining capital if the business is wound up
- Accessing both memorandum and articles of associations have the right for the new companies.
- Right to access to the memorandum and articles of association
- Right to access statutory registers, by the Companies Act 2006
When several share classes are issued, the rights of shareholders become much more complicated. In such instances, having an agreement is even more important.
Rights of minority shareholders
Minority shareholders (those who own less than 50% of the issued share capital of a company) have little control over the management and direction of the company. By the voting power of majority shareholders, the cumulative strength of their votes can be cancelled. An official shareholder agreement is the most effective way to secure the minority from an unfair monopoly.
The financial liability of shareholders
Shareholders invest money in shares and in return earn a share of trading profits. The scope of the company's financial liability is restricted to the value of its shares. This is known as ' limited liability ' and is one of the greatest benefits of forming a limited company.
Shareholders are only required to provide the nominal value of their unpaid shares towards company debts. If the company fails or cannot afford to pay its bills, it is always the company itself that is responsible for these responsibilities, not the shareholders.
Can a shareholder be a director of the company as well?
A shareholder can also be appointed as a director of a company when he or she is at least 16 years old and is not an undischarged bankrupt or disqualified director.
Most companies are owned and managed by only one person who is both the sole shareholder and sole director.
Are the details of the shareholders displayed on the public record?
The names of all shareholders are displayed on Companies House's official public register. During the incorporation process, subscribers are expected to provide their full name and contact/service address to Companies House.
Shareholders who join a business after incorporation only need to include their name if they qualify as a person with significant control (PSC). Information of the company's issued share capital is also disclosed on the public record.
Can a new shareholder be added after incorporation?
There is no legal limit to the number of new members after company formation. This can be achieved by moving existing shares from a current shareholder to someone else, or by issuing new shares ("allocation") to sell to new members. As long as the articles of association do not include a provision of authorized share capital, you can issue as many additional shares as you like.
Transferring shares depends on whether the company has any existing shares to transfer. In most cases, directors have the right to transfer and issue shares, but it is possible to limit the director's powers in the articles.
If the articles of association include any provision preventing a director from approving a transfer or allotment, the existing member must pass a resolution to permit the action. There may also be a clause in the articles or an arrangement between investors that provides existing members with' pre-emptive protection.'
Pre-emptive rights refer to a first-refusal clause that permits existing owners to take additional shares before they are offered to outside investors. It protects their rights and prevents their proportion of ownership from being wrongly diluted.
Do you require a shareholders agreement?
Having the shareholder’s agreement is not a legal requirement. But for a limited company with more than one shareholder, it is highly recommended. It is a legally binding private agreement among shareholders that expands on the Companies Act 2006 and the articles of association. This specifies the basic rights and responsibilities of leaders and employees, the way to manage the business.