Shareholders are the legal beneficial owners of a limited company. These individuals (or companies) invest money in a business in return for a portion ownership in the form of equity shares. In return, they are usually entitled to vote on the management and overall direction of the business and receive a portion of the profits, relative to their percentage of ownership.
Shareholders are also responsible for contributing the value of their unpaid shares if the business is unable to pay its creditors, or if otherwise called upon by the directors to do so. Many small companies are owned by just one shareholder, and they are often the sole director as well. However, companies can have multiple owners and directors who may or may not be the same people.
- Shareholders, subscribers, members – what’s the difference?
- Rights and responsibilities of shareholders
- Can a shareholder also be a company director?
- Can a company hold shares in another company?
- Are shareholders’ details displayed on public record?
- Can I add new shareholders after company formation?
- Notifying Companies House about new shareholders
- Do I need a shareholders’ agreement?
Shareholders, subscribers, members – what’s the difference?
We’ll get the semantics out of the way first. The terms “shareholder”, “subscriber” and “member” all refer to the individuals who own shares in a limited company. However, these terms cannot be used interchangeably to describe all company owners. Let’s take a look at the differences:
The first shareholders in a company are called ‘subscribers’ because they subscribe (add) their names to the memorandum of association during the company formation process. By doing so, they are agreeing to form and become part of the firm by each taking at least one issued share.
All shareholders, regardless of whether they join the company during or after incorporation, are also be referred to as ‘members’. If they hold more than 25% of the issued share capital or control more than 25% of the business, they may also qualify as a ‘person with significant control’ (PSC).
Subscribers do not necessarily have more rights than those who become shareholders after company formation. Their rights and powers are determined by their percentage of shareholdings, the prescribed particulars attached to their shares, and the terms of any shareholders’ agreement that has been put in place.
Guarantors and LLP members
The terms ‘subscriber’ and ‘member’ can similarly apply to the guarantors in a company limited by guarantee. A minimum of one guarantor is required to set up a company limited by guarantee.
Furthermore, the partners in a Limited Liability Partnership (LLP) are usually referred to as LLP members. LLPs must have at least two members at all times. It wouldn’t be a partnership otherwise!
Rights and responsibilities of shareholders
Limited company shareholders are not involved in the day-to-day running of the business unless they are also appointed as directors. They will usually only make decisions on rare occasions when directors have no authority to do so.
What rights do shareholders have?
Shareholders’ rights are defined in the prescribed particulars attached to their shares (which must be in accordance with the Companies Act 2006). Their rights are determined by both the quantity and type (“class”) of shares they own. The prescribed particulars of each share class must be outlined in the articles of association and shareholders’ agreement.
Typically, a company shareholder will have the following rights and responsibilities:
- Taking at least one share in a limited company.
- Agreeing to contribute the value of their shares if a company is unable to pay its creditors. This is known as ‘limited liability’.
- Power to change the company name.
- Power to change the company structure.
- Appointing and removing directors.
- Granting rights and powers to company directors.
- Issuing more shares after company formation.
- Transferring shares to other people.
- Changing the prescribed particulars of rights attached to shares.
- Approving substantial investments.
- Receiving company profits (dividends payments) in relation to the number and value of their shares.
Rights attached to ordinary shares
The majority of new companies issue ‘ordinary shares’. Each one carries equal rights, including:
- Right to and general meetings.
- Right to cast one vote at general meetings.
- Right to dividends (a share of business profits).
- Right to receive a distribution of remaining capital if the business is wound up.
- Right to access statutory registers, in accordance with the Companies Act 2006.
- Right to access to the memorandum and articles of association.
Shareholders’ rights become much more complex when multiple share classes are issued. It is even more important to have an agreement in such instances.
Rights of minority shareholders
Generally, minority shareholders (those owning less than 50% of a company’s issued share capital) have little control over the management and direction of the business. The collective power of their votes can be cancelled out by the voting power of majority shareholders. An official shareholders’ agreement is the most effective way to protect the minority from this type of unfair monopoly.
Financial liability of shareholders
Shareholders invest money in shares and receive a portion of trading profits in return. The limit of their financial responsibility to the company is restricted to the value of their shares. This is known as ‘limited liability’ and it is one of the biggest advantages of setting up a limited company.
Shareholders are only required to contribute the nominal value of their unpaid shares towards company debts. If the business fails or cannot afford to pay its bills, the company itself is almost always responsible for these liabilities, not the shareholders.
Can a shareholder also be a company director?
A shareholder can be appointed as a director of the company if he or she is at least 16 years old and is not an undischarged bankrupt or disqualified director. Many companies are owned and managed by just one person who is both the sole shareholder and sole director.
Can a company hold shares in another company?
A shareholder can be an individual person or some kind of business entity, like another company, an organisation, etc. Non-human shareholders are referred to as ‘corporate shareholders’.
A representative is appointed to act on behalf of the corporate body to attend general meetings, exercise voting rights, sign resolutions and carry out any other shareholder duties. This position is normally held by a director of the corporate body.
Benefits of a corporate shareholder
Established corporations who become Members can provide a number of benefits to smaller businesses because they often have greater resources, influence and experience.
- They can provide capital to buy new equipment or to help the business grow.
- They often have established relationships with suppliers that can provide small businesses with greater bargaining power.
- Their involvement can positively influence other firms, investors and lenders to do business with a smaller company.
- They can offer valuable expertise in corporate governance and strategy, branding, market trends and research, legal matters, investment, sustainability and economic growth.
Important points to note:
- If a corporate shareholder owns more than 50% of a company’s issued share capital, the corporate shareholder becomes the ‘parent’ (holding) company with majority control. The other company then becomes a subsidiary of the corporate shareholder.
- If you sell a large chunk of shares to a corporate shareholder, non-corporate shareholders with smaller shareholdings may be overpowered by the majority votes of the corporate shareholder.
Are shareholders’ details displayed on public record?
The names of all shareholders are displayed on the central public register at Companies House. Subscribers are required to provide their full name and contact/service address for Companies House during the incorporation process.
Shareholders who join a company after incorporation need only provide their name, unless they qualify as ‘person with significant control‘ (PSC). Details of the company’s issued share capital is also disclosed on public record.
Can I add new shareholders after company formation?
There is no statutory limit to the number of new members after incorporation. This can be done by transferring existing shares from a current shareholder to someone else, or by issuing (“allotting”) new shares to sell to new members. As long as the articles of association do not include a provision of authorised share capital, you can issue as many additional shares at you like.
Transferring shares is easier than creating more shares, but it depends on whether the company has any available shares to transfer. In most cases, directors have the authority to transfer and issue shares, but it is possible to restrict the director’s powers in the articles.
If the articles of association contain any provision preventing a director from authorising a transfer or allotment, the current member must pass a resolution to permit the action. There may also be a clause in the articles or a shareholders’ agreement providing ‘pre-emptive rights’ to existing members.
Pre-emptive rights is a ‘first-refusal’ clause that allows current owners to take additional shares before they are offered to outside investors. This protects their rights and prevents their proportion of ownership from being unfairly diluted.
Notifying Companies House about new shareholders
If you choose to transfer shares, you will not have to provide Companies House with information about the new shareholders until your next confirmation statement (previously the ‘annual return’) is due, but it is considered good practice to update this information as soon as possible. If you allot more shares, you must complete the form SH01 (Return of Allotment) and file it at Companies House within one month of the allotment. Again, however, new shareholders’ details do not have to be provided until the next confirmation statement is filed.
The company’s statutory register of members must be updated immediately with details of the new members. If they hold more than 25% of the company’s issued share capital, or have more than 25% control of the business, they may need their details recorded on the register of people with significant control (PSC register).
New shareholders should be issued with a share certificate as proof of ownership within two months of becoming a Member. The company should keep a copy of the old and new certificates and a copy of the stock transfer form. These documents should be stored at the registered office or SAIL address (if applicable).
Do I need a shareholders’ agreement?
A shareholders’ agreement is not a legal requirement, but it is highly recommended for any limited company with more than one shareholder. It is a legally binding private agreement between shareholders that expands on the Companies Act 2006 and the articles of association. It defines the specific rights and responsibilities of members and officers, the way the business should be managed and how certain decisions should be made.
What is the purpose of a shareholders’ agreement?
This type of agreement is an effective way to ensure all members are equally protected and aware of their rights, restrictions and obligations in all circumstances. The exact contents of an agreement can vary considerably from company to company, but the principal purpose of the document is to prevent conflict amongst shareholders. Furthermore, it protects the interests of minority shareholders against the potentially detrimental voting powers of majority shareholders.
Key issues usually covered by a shareholders’ agreement
- Distribution of company profits (dividends, directors loans, reinvestment in the company).
- Appointment and removal directors and secretaries.
- Rights and restrictions of company directors.
- Directors’ salaries.
- Prescribed particulars attached to shares.
- Procedures and restrictions for transferring and issuing shares, such as authorised share capital, pre-emption rights and directors’ powers.
- Company finance and investment.
- Protecting minority shareholders’ rights, e.g. stipulating that company decisions require the unanimous agreement of all shareholders, not just a majority vote.
- Changing the nature or structure of the business.
- Dispute resolution guidance.
- Guidelines for legal proceedings.
- Information rights of shareholders.
A shareholders’ agreement can be drawn up by the members or a solicitor before or after company formation, and it can be altered by the agreement of all the parties involved (or as otherwise stipulated by the agreement). There are no rules stipulating where this document must be kept, but most firms retain copies of the agreement with the statutory records at their registered office and/or SAIL address.
Is a shareholders’ agreement disclosed on public record?
Unlike the majority of company documents and records, a shareholders’ agreement is a private and confidential document. There is no need to file it at Companies House, nor does it have to be displayed on public record or made available to anyone who asks to inspect your statutory registers.
Who can create a shareholders’ agreement?
Any of the members can create an agreement at any time before or after company formation. It’s best to consult a solicitor for professional advice. If the business makes any changes that affect any provisions in the agreement, the document must be updated immediately.