Last Updated: Mar 14, 2024

Shareholder Definition, Types, Roles, and Rights

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🔑 Key Takeaways

  • A share is a unit of ownership in a company, representing an owner’s claim over its assets and profits, and can be sold to investors and traders to raise capital.
  • An individual or entity that buys the shares of a company is called a “shareholder.”
  • Unlike the owners of a sole proprietorship or general partnership, creditors cannot hold shareholders personally liable for company debts in case of insolvency.

What is a shareholder?

A shareholder is any person, institution, or company that owns at least one unit of a company limited by shares. The roles come with certain benefits, such as profits distributed as dividends and the responsibility of overseeing the conduct of directors.

What is share capital?

Also referred to as the aggregate nominal capital, share capital is the value of all available shares of a limited company in the UK.

Shareholder Definition, Types, Roles, and Rights Your Company Formations

A share is a portion representing ownership of a company. Individuals or entities must agree to take up all or part of the shares/ownership portion when forming a company.

The company formation application form contains a statement of capital and initial shareholdings, which show the names and addresses of all the people who have agreed to take up shares and the number each will take.

Shareholder Value

Share value is the value of a single unit of share.


Insight

The share value of the business in its formative stages is often referred to as the nominal value, meaning the face or the assigned value. As the business evolves, the share value changes primarily driven by the company’s performance. A favourable business performance leads to an increase in share value. Market conditions and investor demand are additional factors that influence the value.

The initial shareholders take up shares based on their nominal/face value rather than actual value and a holder may own as little as one share in a company.

What does the term issued capital mean?

Issued capital refers to the funds a company raises, proportional to the value of the shares issued to shareholders at the nominal value rather than their actual value. A company may increase its issued capital by allotting more shares; it must make allotments following the rules prescribed in its articles of association.

Interests of Shareholders

The main interest of shareholders is getting the maximum return on their investments. Depending on the type of shares held, the other interest may be to Influence the strategic and governance decisions of the company, especially for majority shareholders, who hold over 50% of a company stake. For minority shareholders (25% and below), their main interest is to be informed about the company’s decisions and may have some degree of influence.

The type of interest is often defined by the type of share held and its corresponding rights as outlined in the articles of association. Further, a shareholder may be granted special privileges depending on their class of shares.

Types of Shareholders, Voting Power, and Classes of Shares

Companies in England and Wales mostly issue ordinary, preferred, and redeemable shares, which the board can split into different classes to vary the benefits and rights.

You can use shares to raise money for your businesses through equity or fundraising rounds through instruments such as SAFEs (Simple Agreements for Future Equity), allowing you to scale and grow.

Equity funding involves issuing shares at a fixed valuation price and entering into shareholder agreements with the investors. SAFEs are contracts between the founder and the investor that enable the latter to receive equity at a later date under certain conditions, such as the sale of the company or future financing events that enable them to convert their investments into ordinary shares.

In light of the foregoing, the following are the types of shares (Please note that the description below is subject to the provisions of a Company’s Article of Association) —-

  1. Ordinary shares

    These are the most common types of shares in UK companies with the following key features —

    • Voting rights — Holders of ordinary shares have the right to vote at meetings, in proportion to the number of shares held (one vote per share), and participate in company decision-making.

    • Dividends priority — May receive dividends in proportion to the amount paid on their shares but rank behind preference shares in terms of priority

    • Redeemability — Ordinary shares are non-redeemable, meaning a company cannot buy them back at a future date.

    • Winding-up rights — In case of liquidation or sale, ordinary shareholders are also entitled to the distribution of company assets after the company settles all debts and obligations.

    A company, through its articles of association, may have different types or classes of ordinary shares, “Class A Ordinary Shares” and “Class B Ordinary Shares” or any other naming system, with different rights and restrictions.

  2. Non-voting shares

    Issued to individuals, such as the family of the main shareholders or company employees, to grant an interest in the company’s success but restrict their ability to influence the company’s management. Additional features include —-

    • Redeemability — Non-voting shares are redeemable, meaning the company can buy them back at a future date under the circumstances specified in the shareholders’ agreement or articles of association.

    • Dividends priority — In the event of dividend payments on profits, these shareholders have a preferential right/priority to receive their dividends before other classes of shareholders. Non

    • Winding-up rights — Typically, they have the rights to a portion of company assets after all other obligations are settled, subject to the preferential rights of other classes of shareholders, who may have priority in the distribution of assets.

  3. Preference shares

    Also called preferred shares, this class of shareholders is often defined in contrast with ordinary stock. The main characteristics of this class of shares are —

    • Dividend priority — Preferred shareholders usually prefer dividend payments over ordinary stock. However, such payments may be deferred if the company faces financial difficulty.

    • Winding-up rights — In liquidation, preferred shareholders usually have a higher right over company assets and are therefore entitled to distribution before ordinary stock.

    • Voting rights — Shareholders typically do not have any voting rights.

    • Redeemability — The shares are redeemable, meaning the company can repurchase upon fulfilling conditions set out in the articles of association or the shareholder’s agreement.

    Preference shares are an instrumental way to raise funds, giving the holders a high claim to company assets and earnings.

    Depending on your company objectives, there are different types of preferred shares as follows —

    • Cumulative preferred stock — Due to financial challenges, a company may choose not to pay dividends in a given financial year. In such cases, the stockholders receive retroactive dividend payments that were missed or not paid in full when a company has sufficient distributable reserves.

    • Non-cumulative preferred stock — Contrary to the cumulative stockholders, non-cumulative preferred stock does not have the right to receive unpaid dividend payments from past years.

    • Participating preferred stock — Enables the holders to receive an additional dividend payment at a certain profit level or additional assets in the event of liquidation.

    • Convertible preferred stock — Can be exchanged for a certain number of common stock upon fulfilling certain conditions, such as by the board of directors’ vote, automatic conversion at a pre-set date, and accepting the option to convert.

    • Callable preferred stock — It is a type of preferred stock that the company can buy back or redeem at a certain value before maturity.

  4. Deferred Shares

    Typically issued to employees to motivate loyalty and their contribution to the company’s success. They have the following characteristics —-

    • Voting — Deferred shares do not typically do not have voting rights, meaning the holders do not participate in decision-making.

    • Dividend priority — Only receive dividends after the holders of preferred and ordinary shares have been satisfied.

    • Winding-up rights — Holders have no right to benefit from the distribution of company assets in the event of winding-up.

    • Reedemability — Deferred shares can be redeemed under conditions defined in the shareholders’ agreement or articles of association.

  5. Redeemable shares

    • Voting rights — Redeemable shares may or may not carry voting rights.

    • Dividend priority — Depending on the specific terms of the shares, the holders may or may not have the right to receive dividends before or after other share classes.

    • Winding-up rights — Holders of redeemable shares may or may not have the right to assets should a company wind up.

Who Can Be a Limited Company Shareholder?

Any individual or entity with the legal capacity to own property may become a shareholder by buying company shares or transferring them to their name. However, in most cases, a company’s articles of association and shareholders’ agreements may specify the eligibility of its shareholders.

Overview of Shareholders’ Rights and Duties

As owners of a company, shareholders have certain rights and obligations. In addition to the legal company documents such as the articles of association and shareholders agreements, the Companies Act 2006 lays the foundation of shareholders’ entitlements and associated responsibilities.

Shareholders may have the right to —

  • Have their name inserted correctly in the company’s register of members;

  • Receive a portion of profits proportional to their holdings;

  • Acquire a part of the excess capital about their shareholdings if a company is dissolved;

  • Obtain for free a copy of the company’s last annual account, director’s report, any auditor reports, and any other reports for each financial year sent to them by the company; and

  • Statutory right of first refusal (pre-emption right) over issues of new shares by the company to allow them to maintain their percentage shareholding.

Shareholders’ duties are mainly defined around the company’s actions or decisions likely to affect their investments. Some of them include —-

  • Approving significant investments;

  • Authorising the structure of dividends;

  • Authorising the allotment and/or transfer of shares;

  • Determining the powers and salaries of the directors; and

  • Contributing to company debts up to the limit of their liability.

  • Decision-making in exceptional situations where directors have limited powers (e.g., changing the company structure, changing the name of the company, modifying the articles of association, as well as making modifications to the shareholders’ agreement);

  • Provided reasonable notice is given, inspect free of charge company records, registers, and documents, which include —

    • Register of members;

    • Register of directors;

    • Register of secretaries;

    • Payments for loss of office;

    • Register of debenture holders;

    • Records of resolutions and meetings;

    • Agreements relating to the purchase of own shares;

    • Instruments creating charges and register of charges

    • Loans, quasi-loans to, and credit transactions with directors or connected persons; and

    • Directors’ service contracts, including their long-term service contracts and indemnities.

There are additional rights and responsibilities assigned to shareholders with a certain ownership percentage. However, a company’s legal documents further define these rights.

Percentage

Rights and Responsibilities

5% or more

  • Require the circulation of a written resolution;

  • Require a general meeting to be held;

  • Require the company to circulate to shareholders a statement relating to a matter to be dealt with in a proposed member’s resolution; or

  • Prevent the deemed reappointment of the company’s auditors.

10% or more

  • Block consent to a short notice of a general meeting;

  • Require the company’s annual accounts to be audited (where the company would otherwise be exempt).

25% or more

Block a special resolution

50%

Block an ordinary resolutio

50% or more

Pass an ordinary resolution

75% or more

Pass a special resolution

90% or more

Consent to short notice of general meeting

100%

Full control of the company (can do anything)

(Note that the rights and obligations are cumulative, meaning that as the percentage increases, the entitlements and duties in the lower percentages apply.)

What is the Difference Between a Limited Company Shareholder and a Subscriber?

A “subscriber” is the term used to define the initial shareholders of a private limited company. They are referred to as subscribers because, during the company’s formation, they “subscribed” to the company’s memorandum of association.

Their names are included in the public register and remain on the memorandum even if they leave the company. Any person or corporate body who becomes a shareholder after incorporation will not be regarded as a subscriber; instead, they will only be called a “shareholder” and become “members” after their names are added to the register of members.

What Is the Difference Between a Limited Company Shareholder and a Guarantor in a Company Limited by Guarantee?

While a guarantor owns a company limited by guarantee, limited company shareholders own companies limited by shares. Subsequently, both guarantors and shareholders are regarded as members of a company.

Limited company shareholders generally receive a percentage of company profits about the worth of their shares. Conversely, companies limited by guarantee don’t have shares and are typically set up by non-profit organisations. They agree to pay a fixed sum “guarantee” towards the company’s debts.

What Is the Difference Between a Limited Company Shareholder and a Director?

A director is chosen to manage a company’s daily operations and finances on behalf of and for the good of its limited company shareholders. However, the same person can be a director and a limited company shareholder — the latter being a beneficial company owner who offers financial security, receives a share of company profits, and oversees how directors manage the company.

Can a Limited Company Shareholder also be a Company Director?

Company directors can also be shareholders in any company limited company by shares. You can manage a company as a director and be the sole shareholder. Or, you can either be one of many directors and shareholders or just a shareholder and appoint someone else to assume the director role to run the company on your behalf. Company formation legislation does not restrict the number of directors and shareholders a company can have, allowing you to bring in extra shareholders and choose new directors at any time while your company remains in existence.

NOTE: To qualify as a company director, you must:

  • Be at least 16 years old

  • Not be an undischarged bankrupt

  • Not be included on the banned directors register

What Limited Company Shareholder Information Is Available to the Public?

In adherence to public transparency, Companies House outlines several corporate details on the register of companies:

  • Full name;

  • Contact address (only for subscribers);

  • Type of company (e.g., private limited by shares, limited by guarantee, PLC)

  • Details of People with Significant Control (PSCs), including their name, service address, and nature of control;

  • Share capital of the company;

  • Details of shareholders, including their name and the number and classes or types of shares held by each shareholder;

  • Shareholders register, which contains an overview of all shareholders, their addresses, and how many shares each individual owns;

  • The company’s memorandum and articles of association; and

  • The company’s annual accounts and confirmation statement.

Can CEOs be shareholders or Company Stakeholders?

Yes. A CEO can hold a dual role as both a shareholder and a company stakeholder. As the primary figure overseeing the management of a company, the CEO bears ultimate management responsibility which includes strategic and investment decision-making. The individual is answerable to the board of directors, shareholders, and regulatory bodies like Companies House. A shareholder, on the other hand, can be any individual or company holding a stake in the ownership of the company.

Consequently, it is possible for an individual to assume the roles of both a director and a shareholder within a company.

  1. How to Set Up a Limited Company with Companies House

    Here is a step-by-step guide on how to set up a limited company

    • Determine the appropriate company name;

    • Acquire a registered office address;

    • Details of directors and subscribers; and

    • Prepare the official documents, such as the articles of association.

    Read: Company Formation Checklist.

  2. Who owns a limited company?

    The shareholders own a limited company in proportion to the value of a single share. Owners are responsible for overseeing the overall management of the company, contributing money to it if it gets into financial challenges and getting an allocation of its profits. An LLC must have at least one owner with no restrictions on the total number of owners. Use the Companies House Search service to get all the relevant information you need about a company.

  3. What is an entity shareholder or a corporate shareholder?

    A corporate shareholder is a business entity, including a group, company, partnership, or organisation that owns shares in a limited company (LC), non-profit, charity or Limited Liability Partnership (LLP). They have the same responsibilities and rights as individual shareholders, meaning they are entitled to capital gains, losses and dividend payments.

  4. What is the difference between preferred and common shareholders?

    Feature

    Preferred Stock

    Common Stock

    Voting Rights

    Typically no voting rights.

    Voting rights proportion to the number of shares.

    Dividend priority

    Prefers dividend payments over common stock

    Receives dividends after preferred stockholders

    Reedemability

    Redeemable under specified conditions

    Non-redeemable.

    Winding-up rights

    Higher right to company assets in liquidation

    Entitled to assets after settling all obligations

  5. Are shareholders’ agreements public or private documents?

    Shareholders agreements are optional (meaning they are not a statutory requirement), and private contracts (need not be filed with Companies House) between the shareholders of a company. The document outlines the rights and responsibilities of the owners and other matters, such as a capitalisation table summarising the shareholders and their percentage ownership, procedures for the transfer of shares, and any other relevant issue on the treatment of shareholders.

  6. Are companies or shareholders legally required to have a shareholders’ agreement?

    No. A shareholders agreement is not a statutory requirement. However, it is advisable to have these legally binding contracts in place to avoid disputes by guiding the relationship and mandate of the shareholders.

  7. Do I need a solicitor to draft my shareholder agreement?

    Consider working with a solicitor to draft the legally binding shareholder agreement. It should contain key provisions on the duties and entitlements of shareholders and adequately address the company’s and shareholders’ best interests. For it to be enforceable by a court of law, it should carry specific provisions, such as governing law and dispute resolution clauses, which a solicitor can help draft. Further, the solicitor can provide valuable corporate governance insight and help the parties negotiate the contract terms.