With interest rates on savings being almost non-existent, many people are looking at buying shares in companies as a way to improve returns. Another route to becoming a shareholder is if you are awarded shares as an employee or director.
As a shareholder, you can be awarded a share of the profits, paid out through dividends. The market value of your shares can also grow (or decrease) depending on the financial performance of the company.
What becoming a shareholder means in practice depends on whether your shareholding is in a public or private limited company.
As a shareholder the typical decisions you will be involved with include:
- Appointing and removing directors
- Granting powers to the directors
- Approving annual reports and financial statements
- Directors’ remuneration
- Approving changes to the company’s constitution and rules
In a large public corporation, your influence will be limited compared to large institutional investors. If you buy or are given shares in a private limited company you will probably have more influence.
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Are Shareholders Directors?
Not automatically; although in smaller private companies they usually are. Any person can be a shareholder including employees and directors of the company.
Ordinary and Preference Shares
Ordinary shares give shareholders rights to:
- Dividends
- Payment if the company is wound up
- Participation in meetings of the company
Sometimes, preference shares are issued which give shareholders preferential rights to dividends and winding up payments in return for fewer voting rights.
Shareholders can agree to have restricted rights such as non-voting shares or shares not entitled to dividend payments. The company’s articles may specify that a set percentage of the shareholders must vote in favour of varying a right. These provisions can be amended if the company’s shareholders agree.
Liability
Shares have a nominal value. Often this is set at £1. If you have ten shares their nominal value is £10. If you pay for the shares they are known as ‘paid -up.’ The limit of your personal liability for any debts incurred by the company is the unpaid nominal value of your shares.
The market value of your share of the company will probably be many times more than this. If the company issues more shares at a later date this will dilute the nominal value of each share you own.
Minority shareholders’ rights are determined by the percentage of shares owned. The key threshold is a 5% holding which gives you the right to apply to court to prevent a private company turning public. You can also call a general meeting in private companies and present a resolution to be passed at the AGM of a public company.
If you are a business owner considering issuing shares, either to raise capital, reward employees or give part of your business to family members you should take advice regarding the implications. If you are planning to become a shareholder it also helps to take advice on your rights and responsibilities. The Business Team at Powells Law will be happy to help. Contact us on 01934 623 501 or email helpforyourbusiness@powellslaw.com.
