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Shareholder

A shareholder or stockholder is an individual or institution (including a corporation) that legally


owns a share of stock in a public or private corporation. Shareholders are the owners of a limited
company. They buy shares which represent part ownership of a company.
Stockholders are granted special privileges depending on the class of stock. These rights may
include:

The right to sell their shares.

The right to vote on the directors nominated by the board.

The right to nominate directors (although this is very difficult in practice because of minority
protections) and propose shareholder resolutions.

The right to dividends if they are declared.

The right to purchase new shares issued by the company.

The right to what assets remain after a liquidation.

Stockholders or shareholders are considered by some to be a subset of stakeholders, which may


include anyone who has a direct or indirect interest in the business entity. For example, employees,
suppliers, customers, the community, etc., are typically considered stakeholders because they
contribute value and/or are impacted by the corporation.
Shareholders in the primary market who buy IPOs provide capital to corporations; however, the vast
majority of shareholders are in thesecondary market and provide no capital directly to the
corporation.

What rights does a shareholder have?


The rights any shareholder has in any particular company generally depend on the
provisions of the Companies Act 2006, the company's articles of association, the terms of
issue of the shares (which are usually in the articles, but sometimes are in a resolution)
and any shareholders' agreement. Devising the right share capital structure is a complex
business.
Company Law Solutions Limited provides an expert service for setting up different classes
of shares, drafting articles of association and shareholders' agreements.
The general situation is that in return for investing in a company a shareholder gets a bundle
of rights in the company which may vary according to the type of shares acquired. Most
companies only have one class of shares (ordinary shares) but the law in the UK is
extremely flexible and allows any classes of shares to be created. This is done by setting
out the different rights attached to the various classes (usually in the company's articles).
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What rights are attached to the different classes of shares is essentially a matter for the
company to determine. The main rights which usually attach to shares are:
To attend general meeting and vote
Typically shares carry one vote each but there may be non-voting shares or shares with
multiple votes. Some shares may carry the right to vote only in particular circumstances.
See below for the statutory provisions on voting rights. Note also the statutory rights a
shareholder has to appoint aproxy to attend and vote at a general meeting, to requisition a
general meeting, to have a written resolution circulated to the members.
To a share of the company's profits
The distribution of profits is paid by means of a dividend of a certain amount paid on each
share. Adividend may be paid only if the company has made profits and to the extent that it
decides to distribute them. In the absence of any provision to the contrary, dividends must
be paid in proportion to the shares held by each shareholder, but it is becoming increasingly
common for articles to provide that the company's shares are divided into different classes
and for the directors (or shareholders) to be able to vary the dividends allocated to these
classes.
To a final distribution on winding up
If the company is wound up and all the creditors are paid, the remaining assets are available
for division among the members. This may be in two stages: (1) a return of capital; (2)
distribution of surplus capital. Some shares may be given a priority as to one or both of
these, or excluded from participation in any surplus.
To receive a copy of the company's annual accounts
(These need not now be presented at an Annual General Meeting)
That the company be run lawfully
i.e. in accordance with the Companies Act, the general law and the company's constitution.
In most circumstances only the members of the company will have the legal right to sue to
make the company act lawfully, and even they may be restricted in their ability to sue under
the common law rule in Foss v Harbottle. This is a complex area beyond the scope of this
database.
For legal definitions of shares, see: Borlands Trustee v. Steel Bros. [1901] 1 Ch 279 at p.
288; C.I.R. v. Crossman [1937] AC 26 at pp. 40-41, 51-52, 66.

Companies may have different classes of shares, and this is done for many different
reasons. Seeclasses of shares
The Company Law Solutions website provides further information about
the creation, allotment,transfer, and conversion of different classes of shares.

What happens if a shareholder dies?


When a shareholder dies the right to his interest in the shares will pass to whoever inherits
them under his will or intestacy. The deceased shareholder's rights will be administered by
his or her executors (if there is a will) or administrators of the estate if the shareholder has
died intestate. (Executors and administrators are collectively known as 'personal
representatives'.) The company has to accept evidence of probate of the will or letters of
administration to establish the rights of the personal representatives in respect of the
shares: CA 2006 sec774. The personal representatives' rights to deal with the shares are
subject to the provisions of the company's articles. Nearly all companies have either
the Model Articles or the Table A provisions (both set out below) which require the personal
representatives to choose either to execute a stock transfer form, transferring the shares to
the appropriate person, or to apply by letter to be registered by the company as the
shareholder.
This will, however, be subject to any restrictions on transmission in the company's articles.
Restrictions on the transfer of shares will apply also to transmission on death. Many
companies have restrictions on the transfer of shares in their articles, which may allow the
directors to refuse registration of the shares, or impose pre-emptive rights, etc.
Planning in advance what should happen to the shares in a private company in the event
that one of the shareholders should die is an essential matter that company directors and
owners should resolve and have properly documented. It is not something that grieving
relatives and co-directors should have to deal with after a death. Many different
arrangements are possible, including:

a prior agreement that the shares may pass to particular people, such as the
shareholder's spouse, children, etc

pre-emption rights in favour of existing shareholders (or some of them),

arrangements to buy out the dead shareholder's interest, with valuation


arrangements and perhaps time to pay,

a cross option agreement (a contract between the shareholders for the sale and
purchase of a deceased shareholder's shares, and sometimes those of his family
members) combined with life insurance policies to provide the money to pay for the
shares if the situation arises.

The worst possible case is for the situation to be unresolved when a shareholder dies, and
especially where there are conflicting provisions in the deceased shareholder's will and the
company's articles.Company Law Solutions can provide appropriate provisions for company
articles or in a shareholders' agreement to ensure that such problems are resolved before
they arise.
Model Articles provisions
Transmission of shares
27. (1) If title to a share passes to a transmittee, the company may only recognise the
transmittee as having any title to that share.
(2) A transmittee who produces such evidence of entitlement to shares as the directors may
properly require(a) may, subject to the articles, choose either to become the holder of those shares or to
have them transferred to another person, and
(b) subject to the articles, and pending any transfer of the shares to another person, has the
same rights as the holder had.
(3) But transmittees do not have the right to attend or vote at a general meeting, or agree to
a proposed written resolution, in respect of shares to which they are entitled, by reason of
the holder's death or bankruptcy or otherwise, unless they become the holders of those
shares.
Exercise of transmittees' rights
28. (1) Transmittees who wish to become the holders of shares to which they have become
entitled must notify the company in writing of that wish.
(2) If the transmittee wishes to have a share transferred to another person, the transmittee
must execute an instrument of transfer in respect of it.
(3) Any transfer made or executed under this article is to be treated as if it were made or
executed by the person from whom the transmittee has derived rights in respect of the
share, and as if the event which gave rise to the transmission had not occurred.
Transmittees bound by prior notices
29. If a notice is given to a shareholder in respect of shares and a transmittee is entitled to
those shares, the transmittee is bound by the notice if it was given to the shareholder before
the transmittee's name has been entered in the register of members.
Table A provisions:
29: If a member dies the survivor or survivors where he was a joint holder, and his personal
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representatives where he was a sole holder or the only survivor of joint holders, shall be the
only persons recognized by the company as having any title to his interest; but nothing
herein contained shall release the estate of a deceased member from any liability in respect
of any share which had been jointly held by him.
30: A person becoming entitled to a share in consequence of the death or bankruptcy of a
member may, upon such evidence being produced as the directors may properly require,
elect either to become the holder of the share or to have some person nominated by him
registered as the transferee. If he elects to become the holder he shall give notice to the
company to that effect. If he elects to have another person registered he shall execute an
instrument of transfer of the share to that person. All the articles relating to the transfer of
shares shall apply to the notice or instrument of transfer as if it were an instrument of
transfer executed by the member and the death or bankruptcy of the member had not
occurred.
31: A person becoming entitled to a share in consequence of the death or bankruptcy of a
member shall have the rights to which he would be entitled if he were the holder of the
share, except that he shall not, before being registered as the holder of the share, be
entitled in respect of it to attend or vote at any meeting of the company or at any separate
meeting of the holders of any class of shares in the company.
If the only shareholder/director of a company dies, those entitled to the shares can ask the
court to call a general meeting under CA 1985, sec371 and order that the people entitled to
shares can attend and vote as if members of the company. Since the advent of the single
member private company, modern articles often make provision for such eventuality.

What is a shareholders' agreement?

Under the laws of England and Wales, Scotland and Northern Ireland, a shareholder's
agreement is a contract between the shareholders of a company in which they agree how
the company will be run. They all agree that they will use their voting power in the company
to ensure that the terms of the agreement are complied with for as long as they are all
shareholders.

When should a shareholders' agreement be used?


Circumstances vary, but a shareholders' agreement should always be considered when
there are between two and, say, 20 shareholders in a company. A minority shareholder in a
private company needs the protection of a shareholders' agreement against the power of
the majority shareholders.

What does a shareholders' agreement do?

Shareholder agreements vary widely, but the typical agreement is designed to protect all the
parties against a majority using their voting power to the detriment of the others. Without
such an agreement, a company is under the control of those who hold a majority of the
votes at a directors' or shareholders' meeting. Majority decisions are all very well for day to
day matters, but where something goes to the heart of running the company, or materially
affects the interests of individual shareholders, most shareholders want to have their say
and to be able to block a major change. A shareholders' agreement can specify decisions
which require all, or certain shareholders, to agree.
What are typical provisions in a shareholders' agreement to protect shareholders'
interests?
Unless constrained by a shareholders' agreement, shareholders with a simple majority of
votes (e.g. two out of three equal shareholders) have very wide powers under company law.
Without requiring any consent from the other shareholders, they can appoint new
directors (perhaps their friends or family members), remove any director (such as one of the
other shareholders), vote to pay themselves salaries or fees which other shareholders or
directors do not get or issue more shares(so diluting existing shareholders' ownership of the
company). These are only examples. A shareholders' agreement would usually constrain
these powers so that such things can only be done with the consent of all the parties or,
sometimes, a specified majority of them.

What provisions may be included in a shareholders' agreement to give


the shareholder a say in management?
Being a shareholder does not even confer the right to be a directorand that is usually one of
the provisions of a shareholders' agreement. Most agreements will go further by providing a
list of management decisions that require the agreement of all (or a specified percentage of)
the directors. Circumstances vary, but typical provisions relate to matters that are outside
the usual course of the business, such as changing the nature of the business, entering into
unusual contracts or contracts in which a director is personally interested, extending the
company's overdraft (which often all directors have personally guaranteed), borrowing
above agreed limits, employing or dismissing staff in unusual circumstances or bringing or
defending legal proceedings.

Share transfer provisions in a shareholders' agreement

One of the most important areas is the rules that apply when a shareholder wants to
transfer his or her shares, and what can happen to them when the shareholder dies. These
can be set out either in the articles or in a shareholders' agreement. Many companies'
articles give the directors a discretion to reject any transfer by a majority decision. There are
many alternative provisions, such as pre-emption provisions (giving the other shareholders
a first option to buy the shares), free transfers to members of the shareholder's family or for
all transfers to require the consent of all shareholders.

Obtaining a shareholders' agreement


Company Law Solutions provide a shareholders' agreement service ideally suited to the
smaller company. Cost can vary according to the complexity of the agreement. Most
agreements are competitively priced at 350 plus VAT. This is the total charge in most
cases. If complex additional terms have to be drafted, there may be additional cost, but we
would always advise as to the actual cost before proceeding, and the total is very unlikely to
exceed 700 plus VAT.