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While the owner of a share has proprietary rights in the shareholding, these are different from the rights associated with the ownership of other kinds of property, such as real property. For example, the legal owner of a house is entitled (indeed obliged) to have his/her ownership registered in the folio maintained by the Land Registry. No such right exists when it comes to the purchase of shares in a company – the directors have a broad discretion to refuse to register a new owner of shares in the company's register of members. The owner of a house is free to sell the property to anyone he/she chooses. That is not the case when it comes to company shareholders – most shareholder agreements of private companies prohibit sales of shares to the general public without first offering them to the existing shareholders. It is fair to say, therefore, that there are significant limitations to the rights of company shareholders and it is important to know what these are before agreeing to purchase shares.
The default position is that every shareholder is entitled to certain rights: every share carries one vote at a company's AGM or EGM, every share is entitled to receive an equal portion of the company's profits on winding up and dividends for those years where dividends are declared. These default rights originate from the common law and, more recently, the legislation regulating companies, including the Companies Act 2014.
These default rights are not absolute, however, and can be varied by documentation specific to the company and its shareholders. This includes:
Below is a summary of some of the most common rights and restrictions contained in each of these.
The Companies Act 2014 sets out a number of key rights and remedies available to company shareholders. The most fundamental among them include the following:
Section 169 of the Companies Act 2014 requires every company to maintain a register of members. A "member" is, in effect, any shareholder whose name appears in the register of members. While the terms "shareholder" and "member" are often used interchangeably, the distinction is important. Most of the rights and remedies contained in the Companies Act 2014 are available only to members and not to shareholders. For instance, an application under section 213 in respect of oppression against a minority shareholder can only be made by a member. This distinction becomes important where a person purchases or inherits shares from an existing member – it should not be assumed that the new owner will automatically be registered as a member in place of the former owner. Section 95 gives the directors a broad discretion to refuse to register a transfer. Since such a refusal has the effect of depriving a transferee of many of his/her rights, the directors' refusal can be challenged by applying to the High Court for an order rectifying the register of members.
Apart from the register of members (which every member is entitled to inspect), a company must also maintain certain other registers and documentation which must be made available for inspection to members pursuant to section 216 of the Companies Act 2014. Some examples include:
A company is also required to make filings with the CRO which are available for inspection by all members of the public. Some of these are required to be made periodically (such as the company's annual returns and accounts) while others must be made on the occurrence of specific events (such as the removal or appointment of a director).
From my experience of advising company shareholders, they are often surprised by just how little information they are entitled to receive. For instance, they are not entitled to receive the company's management accounts or to view specific contracts entered into by the company. They are not entitled to know the identity of the company's customers, suppliers or employees. The right to receive this additional information may be negotiated separately between the company and individual shareholders but it is not automatic and, even if agreed separately with some shareholders but not others, may be open to challenge.
The right of members to vote at a general meeting is contained in section 188 of the Companies Act 2014. However, the provision expressly provides that the right will apply "save to the extent that the company's constitution provides otherwise". Regardless of whether a member's shares carry voting rights, every member is nevertheless entitled to receive notice of every general meeting and to attend meetings (section 180).
Section 124 of the Companies Act 2014 empowers a company's directors to recommend and pay a dividend out of distributable profits or reserves. The directors' recommendation to pay a dividend must be approved by ordinary resolution of the company. Similarly, the members of a solvent company are entitled to receive a distribution following the company's liquidation. Dividends and distributions are among the most important rights attaching to shares – while it is normal for many shareholders to fail company meetings and exercise their right to vote, I have yet to meet a shareholder who refused to accept a dividend or distribution. After all, the receipt of corporate profits is the reason shareholders purchase shares in the first place. Even these rights may, however, be subject to restrictions contained in the constitution and/or shareholder agreement. It is common practice, for instance, for the right to receive a dividend/distribution of ordinary shareholders to be subordinated to the rights of preference shareholders. In general, the preference shareholders will receive their dividend entitlements first (usually expressed as a percentage of their shareholding) and only once this is paid will the ordinary shareholders be entitled to share the remainder (if any). Where the company is particularly profitable, this can work in favour of the ordinary shareholders who may receive considerably more than the preference shareholders because of the substantial pot remaining after the preference shareholders have been paid.
While the Companies Act 2014 regulates every company registered in Ireland, each company has a constitution specific to it which regulates its affairs to the extent that this is not inconsistent with the Companies Act. The Constitution typically sets out day-to-day matters such as: the conduct of meetings, the appointment and retirement of directors, the delegation of management function etc. But crucially, from a shareholder's point of view at least, it specifies the restrictions on rights attached to specific shares. This is normally done by dividing the shares into various "classes" and then setting out the rights attaching to each class. The rights attaching to a particular class are typically a reflection of the price paid for those shares. For example, shares purchased at a higher price may attract a higher dividend. But the different classes may also reflect the particular interests of the investor who owns the shares. For instance, an investor interested in receiving a fixed annual dividend but who is less interested in having any say in the stewardship of the company may hold shares reflecting this i.e. entitlement to a fixed dividend with no voting rights.
It should also be noted that many of the provisions of the Companies Act 2014 are expressed to apply "save to the extent" that the company's constitution says otherwise. An example of this is section 69(6) which prohibits a private company from allotting shares to an outsider unless the existing members are fist offered the shares on terms at least as favourable as those on which the outsider would purchase them. This so-called "right of first refusal" is however subject to a contrary provision in the company's constitution (section 69(12)).
It is advisable for any person thinking of investing in a company to obtain a copy of the company's most current constitution (available from the CRO) before agreeing to purchase shares. At the same time, it is important to remember that the company's constitution is not a static document – it can be amended by a special resolution of the company's members. In that sense it is different from the Companies Act 2014 (which can only be amended by the legislature) and from a shareholder agreement (which can normally be amended only by consensus of all the parties).
It is advisable that every company should have a shareholders' agreement. This contains provisions more detailed than would be appropriate to be put into the constitution. But if all the shareholders have agreed to its terms then they are bound by them to the extent that the terms are not inconsistent with the Companies Act and the constitution. If a member sells his/her shares, the transferee will be expected to sign up to the agreement. The company itself will also normally be a party to a shareholder agreement, meaning that its terms can be enforced against the company by individual shareholders.
An example of a provision typically found in a shareholders' agreement is the procedure to be followed in the case of a stalemate or dispute in a company owned by two members with equal voting power. Were it not for such a provision, the company would come to a complete standstill at the first sign of conflict between its two owners. Another example is the "right of first refusal" applying in a case where one shareholder seeks to exit the company by selling his/her shares to an outsider (as distinct from the "right of first refusal" in the context of the allotment of fresh shares, discussed above).
The purpose of shareholder agreements is to regulate the corporate relationship between shareholders and the company, and between the shareholders themselves. It does so in a level of detail not typically found in the company's constitution. The advantage for the parties is that it adds an additional layer of certainty and its terms can be enforced as ordinary contractual terms, bypassing the expensive and cumbersome procedure involved in minority shareholder dispute proceedings under the Companies Act.
The ownership of shares in a company represents the ownership of a package of intangible legal rights relating to the company with the expectation of a periodic of cumulative pay-out at some future date. Precisely which rights are included in that package will vary between different companies and between different classes of shares in the same company. It is therefore important for both the company and the prospective shareholder to ensure that the rights attaching to each share are correctly framed at the outset of the relationship. Any ambiguity or perceived unfairness in the distribution of corporate interests is likely to lead to conflict and, particularly in smaller companies, will adversely affect the ability of the company to continue trading in the future.
Author: Mahmud Samad BL
Publication date: 27th July 2023