According to a report by Companies House, 5,166,743 corporate entities were registered with Companies House as of the end of March 2023, with approximately 93% of them being Private Limited Companies. The owners of these companies hold shares and are known as shareholders. A person becomes a company’s shareholder by buying the shares issued by the company. Since every limited company must have at least one shareholder, there are millions of shareholders across the UK.
There is no set requirement for the value of individual shares, meaning shares can be priced at any amount. In the event of liquidation, shareholders are responsible for covering the company's liabilities from the share capital invested in the company. As a result, it is common practice to set a low share price, often £1, to minimise shareholder liability. Aside from this financial responsibility, shareholders also have certain rights and responsibilities tied to their position. This article will explore those nuances, addressing questions such as the differences between shareholders and guarantors.
Roles of Shareholders in a Limited Company
While shareholders enjoy numerous rights, they also carry certain responsibilities. These responsibilities ensure that the company runs effectively and meets its legal obligations.
Providing Capital
Shareholders invest in the company by purchasing shares. This capital funds the company’s operations, expansion, and innovation.
For a property letting company, shareholders may invest in expanding the property portfolio, investing in the facilities offered to tenants, etc.
Decision Making
Shareholders are required to vote on important matters, ensuring that key decisions reflect the owners' collective will. For example, shareholders may need to vote to approve the appointment of company directors or proposed dividends.
Adhering to Company Rules
Shareholders must abide by the company’s articles of association, which set out the rules governing the company. They must also comply with relevant laws, such as the Companies Act 2006, which regulates the role of shareholders and directors.
Rights of Shareholders in a Limited Company
Shareholders in a limited company enjoy certain key rights, some of which are dictated by law, while others are laid out in the company’s articles of association. Common rights include:
Shareholders typically have the right to vote at general meetings. Voting power usually corresponds to the number of shares they own. This gives them influence over key decisions, including the appointment of directors or approval of dividends.
Shareholders typically have the right to vote at general meetings. Voting power usually corresponds to the number of shares they own. This gives them influence over key decisions, including the appointment of directors or approval of dividends.
Shareholders have the right to access certain company information, including annual accounts and general meeting reports, ensuring transparency and accountability.
Shareholders can attend general meetings, where they can discuss company performance, future plans, and key decisions with the directors.
When further shares of a company are issued, the ownership of existing owners may be reduced. Therefore, existing shareholders have the right of first refusal if the company issues new shares, ensuring their ownership isn’t diluted without consent. If existing shareholders choose not to buy the shares, shares will be issued to the public.
Types of Shareholders in a Limited Company
In the UK, ordinary and preference shareholders are the most common types of shareholders in a limited company. Ordinary shareholders own 'ordinary shares' and are entitled to the company's residual income—what remains after all liabilities have been settled, especially in cases like liquidation. This entitlement comes with a higher risk, as ordinary shareholders may lose their share capital in a company if things go wrong.
In contrast, preference shareholders are not entitled to residual income but receive other advantages. They are guaranteed dividends at a fixed rate, which must be paid before any dividends to ordinary shareholders. In the event of liquidation, preference shareholders are prioritised over ordinary shareholders for repayment.
UK limited companies may also issue deferred shares. The holders of such shares, known as deferred shareholders, only receive dividends after a minimum dividend has been paid to ordinary shareholders. If this minimum dividend is not met, deferred shareholders receive nothing, making these shares less popular than the former two.
How are ‘Shareholders’ and ‘Guarantors’ different?
Shareholders and guarantors differ similarly to how ‘companies limited by shares’ differ from ‘companies limited by guarantee’. There is no share capital in companies limited by guarantee, and these entities are usually non-profit organisations. Instead of shareholders, the company has guarantors who agree to pay a guaranteed amount if the company cannot meet its debts.
The primary distinction is that companies limited by guarantee have guarantors and a guaranteed amount, while companies limited by shares have shareholders and share capital. Although both guarantors and shareholders are members who help control the company and make decisions, guarantors do not usually extract the profits from the company but choose to reinvest. Meanwhile, the main aim of shareholders in a limited company is usually to maximise profits.
Differences between Shareholders and Directors
Shareholders are a company's owners, whereas directors are its gatekeepers employed by the owners. Directors are employed by the shareholders to run the company. Therefore, the responsibilities and rights of shareholders and directors vary significantly.
A key responsibility of the directors is to file the company’s financial statements, confirmation statements, etc. to Companies House and the Corporation Tax Return to HMRC. While the directors can hire professionals to manage such affairs, the directors ultimately bear the ultimate responsibility. Shareholders do not need to worry about these affairs.
Similarly, it is the directors’ responsibility to propose dividends and the responsibility of the shareholders to either approve or reject such proposals. The directors must ultimately work towards the maximisation of shareholders’ wealth.
Conclusion
In summary, shareholders in the UK hold significant rights and responsibilities, playing an essential role in a company's decision-making and financial well-being. Whether through voting rights, entitlement to dividends, or adherence to company rules, shareholders directly influence a company's direction and success. Their liability is generally limited to the amount they invest, making shareholding a low risk but impactful way to contribute to a business. By understanding the roles of ordinary, preference, and deferred shareholders, as well as the key differences between shareholders, guarantors, and directors, one can navigate the often-complex landscape of corporate ownership in the UK.
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