There are some aspects of shareholders’ agreements which are particularly relevant to minority shareholders and which are therefore mentioned here.
Right of action/enforceability
A shareholders’ agreement provides a right of action which enables one member to enforce the provisions of the shareholders’ agreement directly against another, whereas under the articles this right of action may not arise. Because of the difficulties shareholders can encounter in enforcing the provisions of the articles under s.33 CA 2006, a shareholders’ agreement can be used in order to ensure the enforceability of provisions that would not be regarded as membership rights, such as the right to be appointed as the company’s solicitor or the right to approve certain transactions.
If a term of a shareholders’ agreement is breached it can be enforced in the usual way under general contract law principles. A shareholder will be able to claim for breach of contract, or alternatively could apply to the court for an injunction to prevent a breach of the terms of the agreement. A shareholders’ agreement can also prevent the need for s.994 petitions, although it obviously cannot stop a disgruntled shareholder from bringing such a petition.
Reserved matters in shareholders’ agreements
As mentioned above, certain matters can be reserved in a shareholders’ agreement as matters requiring the consent of all shareholders or certain individual shareholders. This is an additional way in which minority shareholder rights can be protected. The type of matters reserved to shareholders under a shareholders’ agreement may include amendments to the articles of association, the issue of new shares, or the appointment or removal of a director.
For example, in order for a company to remove a director from office an ordinary resolution requiring a simple majority is required under s.168 CA 2006 (and s.281(3) CA 2006). A minority shareholder owning 5% of the shares in a company will therefore not be in a position to influence the outcome of a vote on this matter (unless he or she is able to join forces with other shareholders to make up the relevant majority).
A shareholders’ agreement may provide, however, that the unanimous consent of all shareholders is required in order for a resolution to remove a director to be passed. It is important to note that such a provision does not remove the statutory right of the majority shareholders to remove a director under s.168 CA 2006, as a company is bound to accept the vote of a shareholder even if this is in breach of the provisions of the shareholders’ agreement.
In a situation where a resolution is passed without the required unanimity and therefore contrary to the terms of a shareholders’ agreement, provided a simple majority voted in favour (in accordance with CA 2006), the resolution would still be valid and the director would be removed from office. The director would then have a claim against the other shareholders for breach of the shareholders’ agreement. This may give the impression that a minority shareholder has only minimal influence. However, in reality the threat of a breach of contract claim effectively means that the minority shareholder is able to influence whether or not the resolution is passed, despite his or her minority shareholding. To this end a shareholders’ agreement minimises the effect of the principle of majority rule. Such provisions are sometimes known as veto provisions.
Amendments to shareholders’ agreements
A further reason why parties may enter into shareholders’ agreements is that amendments to a company’s articles of association can be made by passing a special resolution requiring 75% approval. Changes to a shareholders’ agreement in contrast will require the unanimous approval of all parties to the agreement. This would consequently give a minority party a right of veto.