The day to day running of a company is carried out by the directors with certain important decisions being reserved to the shareholders, such as changes to the articles of association and authority to allot shares. The decisions reserved to the shareholders are taken following the principle of “majority rule”: a requisite majority of the shareholders must vote in favour of the proposed resolution in order for it to be passed. Significantly, the majority is able to appoint and remove directors from the board, thereby maintaining day to day control over the company.
Bearing this principle in mind there is often little that a minority shareholder can do to influence whether or not a resolution will be carried, or how a company is run day to day, unless he or she can join forces with other shareholders in order to make up or block the majority required. In most cases, therefore, the minority shareholder must simply live with decisions made by the majority.
There are statutory (and certain limited common law) remedies available to disgruntled minority shareholders, but they are far from ideal because they are often costly to pursue and uncertain in terms of the likelihood of success and the remedy likely to be granted by the court. For these and other reasons shareholders may enter into shareholders’ agreements, which aim to minimise the effect of the principle of majority rule by setting out how the company is to be run as between the shareholders and how the shareholders will vote on certain matters.
So, for example, the shareholders of a company with minority shareholders might sign up to an agreement requiring the unanimous consent of all shareholders before certain matters can occur. Such a matter might include the passing of any resolution or doing anything which would lead to a substantial change in the nature of the company’s business. This would prevent the company’s directors taking the company into a different area of business unless all the shareholders gave their consent.