Last week we focussed on boardroom battles between directors. So what if the shareholders fall out with the directors?
Shareholders are generally only entitled to receive dividends. But there are key documents to which a shareholder is entitled, and a failure to provide these documents when requested can lead to serious consequences for the company and officers in breach. Under the Companies Act 2006, shareholders have the right to receive a copy of the companys last annual accounts and directors reports within seven days of making a request. If the request is not complied with, a criminal offence is committed by the company and every director who is in default. A shareholder is also entitled to inspect minutes of general meetings (but, weirdly, not board meetings), the companys register of members and the directors service contracts. This ability to inspect directors service contracts can be particularly helpful where a shareholder believes that the directors are helping themselves with excess drawings.
A shareholder who holds at least 5% of the issued share capital in a company can also require the circulation of a written resolution or statement to all the shareholders in a company. They can also call a general meeting of the Company. This can be particularly useful where the shareholder has particular questions which they wish directors to answer.
Small private companies are not required to appoint auditors and most do not. However, a shareholder who owns 10% of the shares (or shareholders who together own 10%) can require the company to appoint an auditor (at the company expense). This is a useful tool for minority shareholders who might gang up together to demand this.
Shareholders agreements then come into play, because these can provide shareholders with additional rights to information by allowing the shareholders to request access to a wider variety of documents. If you are a shareholder looking for information about a small company, is there a shareholders agreement? If yes, then look up access to information.. Or, get it added! This could be by changing the articles, but more commonly by agreement.
How is all this relevant to me? One consequence of being entrepreneurial in financial services is the Icarus effect. Fly too close to the sun and your wings may melt. FCA have a nasty habit of picking on individuals, and if they dont approve, then they may require your exit from a business. One of IFACs more successful clients had the founder director and sole shareholder removed by agreement with the FCA. The business thrived in his absence and all looked good until the shareholder tried to sell the business. The remaining directors lined up and made it clear that without their consent, they would leave.
A shareholder rights are limited, both in law, and also in practice by relations with directors. The directors did then leave, and the trading went with them.
Those of you with licences can bless your luck. The new FCA authorisation regime is tightening up at such a dramatic pace that IFAC predict that within three years it will be almost impossible for anyone to get a licence, and at best the process will take years, not months. The barriers to entry are higher than ever before, and the board of directors and shareholders have more incentive than ever before to co-operate for mutual gain.