Business, Investing, Investment planning, Protecting

Minority Sharehholder Protection

15 May 2023

I’m a Minority Shareholder – what type of protection will I need?

As a minority shareholder, you are a part-owner of a company but hold a small portion of its total shares, meaning that you have limited control over the company’s decisions. However, you still have certain rights and protections that you should be aware of to ensure your investment is safe. In this article, we will discuss the protections you need as a minority shareholder and how you can enforce them.

Why do minority shareholders need protection?

Most commonly, the biggest problem you’ll face as a minority shareholder in a private company is the limited say in both finances and decision-making. Directors of the company are typically the majority shareholders or appointed by them, so will normally hold more power than yourself. Though this is to be expected in minority shareholder agreements, sometimes the lack of financial visibility or say-so when it comes to decision making can be an issue, especially if you feel there’s an abuse of power taking place.

Some of the main issues for minority shareholders include:

  • Information changes, minority shareholders having domain information move from their accounts without sign-off
  • Dilution of shares in event of change in the company
  • Desire for investment agreements and shareholders’ agreements to enhance the rights and protections for minority shareholders
  • Ongoing minority shareholder disputes
  • Minority shareholders can, with suitable changes to the articles or shareholders agreement, be given powers of veto. This is not always the case without an agreement
  • Abuse of power by directors and/or controlling shareholders.

It’s also worth knowing where your rights lie as a minority shareholder. As a shareholder of 5% you get:

  • Ability to require company to call a meeting
  • Able to prevent the deemed reappointment of an auditor

As a shareholder of 10%:

  • Call a poll vote at a general meeting
  • Able to require an audit

These are just basic overviews, but your own personal stake in the company will come with it’s own rights and provisions. Before seeking out any form of protection, make sure you’re aware of which rights and protections you already have in place, as this will allow you to focus on the more critical areas that you may require from any agreement.

What is Shareholder Protection insurance?

If you’re a minority shareholder, you might be wondering what kind of protection you’ll need going forward. Shareholder protection insurance is a type of insurance policy that provides financial protection to the shareholders of a business in the event of the death, illness, or disability of one of the shareholders. It is also known as ‘shareholder agreement insurance’ or ‘business will insurance’.

This type of insurance policy can help to protect the value of a business by ensuring that if one of the shareholders dies or becomes incapacitated, the other shareholders can buy their shares from their estate. This can help to prevent the business from being sold or broken up and can provide the surviving shareholders with the funds they need to buy out the deceased shareholder’s interest.

Setting up shareholder protection follows some standard procedures; each shareholder takes out an own life cover with a sum assured equivalent to the value of their shares. The policy is put into trust, with co-shareholders named as beneficiaries. The premiums are paid through the business, and any pay-outs from a claim are paid directly to the business, intended for buying back shares.

Ownership Protection prevents the owner/registrant contact information from being changed, with an official form requiring submission from the registered domain owner. This will prevent your domain from being moved to another account without proof of identity or organizational vetting, meaning you can sleep easy knowing that the rug cannot be pulled from under you. Shareholder protection also allows the business owners to buy shared back from co-shareholders in the unfortunate event of a terminal diagnosis or death. Of course, this isn’t the type of thinking or planning that people want to entertain, but expecting the unexpected is the whole point of shareholder protection.

Shareholders Agreement

When you take out shareholder protection insurance, you will usually be required to agree on a ‘shareholders’ agreement’ with your business partners. This agreement will outline the terms and conditions of the insurance policy, including the amount of cover you require, how much each shareholder will contribute towards the premiums, and how the policy will be paid out in the event of a claim.

A shareholders’ agreement is a legally binding contract between shareholders that sets out the rules for how the company should be managed. It can include provisions for protecting minority shareholders, such as requiring a supermajority vote for major decisions or providing for buyout provisions if a majority shareholder wants to sell their shares. Time and cost can be saved if minority shareholder protection is agreed via the articles or a shareholders’ agreement before the shares are acquired – but, of course, this isn’t always the case.

It’s often asked whether it is possible for an individual to write their own shareholders’ agreement or whether a solicitor is required. Although not necessarily a requirement and very possible to do alone, it’s always wise to hire a lawyer when drafting the agreement. As well as the standard protection, it also contains guidelines on voting and approvals, pre-emptive rights, rights of first refusal, call/put options, buy/sell rules, dispute resolution, and non-solicit/non-compete rules. These are areas of the law that you will most likely want the help of an experienced head to navigate, even if it is just advice.

This is just a basic overview of what potential challenges you can alleviate with a shareholder agreement or insurance. This is by no means an entirely comprehensive account of how to completely cover yourself as a minority shareholder – or even a shareholder in general. To get full and extensive advice that is personal to your business or experience, get in touch with one of our advisers at Morrinson Wealth.

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