Shareholder rights and disputes FAQs

In law, companies exist independently as separate legal entities. They function through their directors and officers, who act as agents for the company. The directors owe certain legal duties to the company. They’re also required to fulfil specific legal obligations, such as maintaining the company 'books' and records to ensure that the company meets its own legal obligations.

Directors and employees are accountable to the company through the board of directors. This is the decision-making body responsible for the strategic and operational direction of the company.

A company is generally owned by way of shares that are issued to investors. 

In principle, there are almost no limits to the number of shares that can be issued in a company and the various types of shares that can be created. 

It’s the owners of the shares (the shareholders) who ultimately have the power to determine the direction of the company. This is done by exercising their voting rights at shareholder meetings. However, since shareholders generally don’t deal with day-to-day operational matters, such meetings tend to be held far less frequently than board meetings.

The overall framework in which directors and shareholders operate a company is set out in its articles of association. These essentially act as the ‘constitution’ of the company. 

Articles of association will often prove to be critical in your efforts to assert your rights as a shareholder.

'Articles of Association' and 'Memorandum of Association' are documents that regulate the powers of a company and the rights of shareholders. Being familiar with how they work will help you to protect your rights and promote your interests as a shareholder.

Every private limited company in England and Wales has its own 'Articles of Association' and 'Memorandum of Association' — often simply called 'the articles' or 'the memorandum'. 

Since October 2009, the role of the memorandum has been greatly reduced. This is because it has no real purpose beyond serving as evidence of the identities of a company’s original shareholders (although the memorandum of older companies can still be relevant in some circumstances, with certain provisions now deemed to form part of the articles).

On the other hand, a company’s articles are fundamental in regulating how it lawfully goes about its business and the rights of its shareholders. 

These remain a fundamental (and often the only) document in determining the operation and powers of any private limited company.

When a company is created (or ‘formed’) it will be given a default form of articles of association — the ‘model form of articles’ or ‘Table A’ in older companies — unless some other form of articles are specifically requested.

The contents of a company's articles are subject to the provisions of company legislation.

It’s essential to obtain an up-to-date copy of a company's articles (available from Companies House) before you undertake any analysis of its (or its shareholders’) legal position. While general statements about shareholder rights can be made, these are almost always subject to alteration by the articles.

There are five parts to the model articles of association:

1. Limited liability of shareholders.
2. Directors.
3. Shares and distributions.
4. Decision-making by shareholders.
5. Administrative arrangements.

The role of the board is to make the strategic and operational decisions of the company. Directors are charged with ensuring that the company meets its legal obligations and acting as agents for the company, appointed by the shareholders to manage its day-to-day affairs.

Directors are generally empowered to exercise all the powers of the company. Technically, the powers of the board must usually be exercised by the board (collectively) at board meetings. However, in practice many boards often act informally — particularly where the directors enjoy a close working relationship.

Board meetings can also be held casually, especially when all the directors are in agreement. There’s no minimum number of board meetings required by law, though directors must meet sufficiently often to ensure that they’re discharging their duties as directors. Resolutions of the board (where required) can also be reached in writing.

Each director has a legal obligation to the company to carry out certain duties, including:

• acting within the powers set out in the articles
• promoting the success of the company
• exercising independent judgment (and not just doing as someone else says)
• exercising reasonable care, skill and diligence (i.e., not acting negligently)
• avoiding conflicts of interest and not accepting benefits from third parties.

Most company directors would be alarmed at the strict duties they owe to the company. These include maintaining registers of directors, their usual residential addresses, the company’s shareholders and people with significant control over the company. 

By law, these registers must be kept open to inspection by shareholders.

For many of the obligations on directors, a breach can be a criminal offence. That’s why it’s important for shareholders to be aware of their rights and the duties owed by the company directors.

Company books are a core source of information for shareholders.

Companies in the UK are required to create and maintain a collection of registers known as company statutory registers (or company ‘books’). These record evidence of the company’s history and constitution, providing insight into its structure and regulation. 

For the uninitiated, they can be difficult to navigate.

The Companies Act requires every private company to keep and maintain registers of:

1. directors
2. directors’ usual residential addresses
3. company members (i.e., shareholders)
4. secretaries (where applicable)
5. people with significant control over the company
6. any charges registered against the company (where registered on or before 6 April 2013).

These registers or ‘books’ can be kept in hard copy or electronically (provided that they’re capable of being reproduced in hard copy). They must be kept at the registered office of the company, unless some alternative inspection address has been registered with Companies House.

In practice, many companies don’t have (let alone maintain or update) company books. Technically, this is a criminal offence.

As a shareholder, there are certain questions you may need to ask, such as: 

• Who became a director and when?
• Who became a shareholder and when?
• How many shares are held by a specific shareholder and when were they acquired?

The first (and often only) source that you can consult to answer these questions is the company books. That’s why it’s vital to know how to access them and understand what they contain.

Directors, secretaries and senior managers of companies can be referred to as company ‘officers’.

Each of these hold a different role with different responsibilities. 

Since the directors of a company determine its commercial direction — impacting the return on investment for shareholders — it’s essential that you know who these people are and which responsibilities they hold.

Since 6 April 2008, private companies are no longer required to have a Company Secretary unless its articles expressly require one. This role is now optional. If there is no company secretary, then someone else will need to carry out the functions typically undertaken by a secretary. 

Modern companies must have at least one director who is a 'natural person' — i.e., a human being rather than another limited company or Limited Liability Partnership — at all times. 

The old practice of only having limited companies registered as directors has now been made unlawful. Legislative changes are proposed to require all directors (not merely sole directors) to be a 'natural person'.

While there’s no legal limit to the number of company directors that can be appointed, a company's own regulations or articles may regulate the maximum or minimum number of directors.

Companies are what lawyers call 'separate legal entities'. With its own legal identity, a company can own property, enter into contracts and sue (or be sued) in its own right.

Some shareholders find it difficult to grasp the concept that company property, assets and money belong to the company and aren’t the property of the shareholders (often also called 'members') — even if the company in question is 100% owned by the shareholders.

Each company in England and Wales is given a unique company number by Companies House and will retain (and be identified by) the same company number throughout its existence — no matter how many times the company changes its name.

You need to do your research and stay abreast of developments in a company, as its dealings can impact your investment as a shareholder. We can use our expertise to help you stay up to date.

A General Meeting is simply a meeting of shareholders. 21 days’ notice must be given to shareholders, though this can be reduced to 14 days (or increased to 28 days) in certain situations.

The old term 'Extraordinary General Meeting' (EGM) has been replaced with the term 'General Meeting'.

An Annual General Meeting (AGM) is typically used to appoint company auditors and ‘lay before’ shareholders a copy of the last year’s accounts. 

Shareholders aren’t asked to approve the accounts and are merely provided with a copy. However, shareholders can ask questions on matters covered in the accounts.

There may be additional matters that require a vote. The notice that called the meeting should tell you this. There are provisions that set out the basic level of detail that must be included on each notice.

There is no legal requirement to hold an Annual General Meeting (AGM), unless this is required by a company’s articles.