Being a shareholder, particularly in a smaller company is not without risk. This article sets out what those main risks are and how you can protect yourself.
Shareholders are primarily investors in a company. In small and medium sized businesses they will often also be the business owners and directors of the company. In a larger listed company, they are likely to simply be investors, who have no day to day role in the company.
Directors duties
Company legislation provides certain safeguards to ensure that a company is protected from officers of the company using it for their own benefit and abusing their position to the detriment of the company and therefore the shareholders.
Company directors are subject to fiduciary duties to the company, and its creditors, and can be held accountable for breach of these duties in both solvent and insolvent companies often with personal liability penalties for breach.
While there are remedies available to the company if a director breaches their duties, shareholders can face a number of risks in their shareholding.
Reliance on profitability and dividends
If a shareholder is reliant on company profitability and the declaration of dividends each year, then this can cause problems if they don’t receive them.
However, a company may only declare dividends if it has made a profit after taxation. Even so, it is not necessarily the case that the company directors will decide to declare a profit. They are under no obligation to do so, and this money may be better used to provide capital for further growth of the company. In that case, there is very little that a shareholder can do unless there is a negative purpose behind the act by the directors.
Control over management
Shareholders control over the management and the day to day running of the company is limited, particularly if a shareholder is a minority shareholder and therefore doesn’t have sufficient voting power to push through any resolutions by themselves.
Shareholders are entitled to attend annual general meetings and be provided with some of the company’s financial records, but these are limited. Shareholders have the right to call meetings at any time during the year in order to propose resolutions, as long as these are reasonable and not vexatious. In this way shareholders can regain some control in a company if needed.
Selling shares and exiting the company
There can be difficulties in valuing the shares of a company that may make selling and exiting the company problematic. In a public listed company, exiting shareholders will have little problem, as shares are valued on a day to day basis and they should be fairly easy to sell.
However, in a small or medium sized company, shares may not be easy either to value or to sell. In addition, other shareholders may have rights of first refusal to purchase the shares, and the shares may be subject to a discount if they do not have majority control. A well drafted shareholders agreement should cover this and set out how shareholders may exit and sell without too many problems.
Insolvency
On an insolvency situation, the benefit to being a shareholder is that your liability to the company and to its creditors is limited to the amount of your shareholding.
Unfortunately though, shareholders are at the bottom of the pile to be repaid out of monies available in the company, and this almost inevitably means that shareholders will lose the money they invested.
However, this does mean at least that shareholders know the maximum basis of their liability. This is of course not necessarily the case if shareholders are also directors, who may potentially be personally liable financially for any breach of director’s duties.
At Francis Wilks & Jones we have many years of experience advising shareholders on their risks, and on the remedies available to them to manage their investment in companies of all sizes. Contact us for a chat to see where we can help you. The most common areas for you to be concerned with are likely to be the following:-
- abuse by non-shareholder directors;
- control over management;
- acting as a director;
- sleeping partners liability;
- rights issues and dilution of shareholding;
- reliance on company profitability;
- changes to Companies House;
- annual general meeting;
- insolvency.
At Francis Wilks & Jones you will always speak to someone at a senior level who will respond to any query you have immediately. Please call any member of our team for your consultation now Alternatively email us with your enquiry and we will call you back at a time convenient to you.
