How to: The rights, powers and liabilities of shareholders

Introduction

You are a "shareholder" if your name is entered on a company’s share register (see How to maintain a company share register) as being the holder at that time of one or more shares in the company, or if you are entitled to be on the register and are waiting to be included on it.

Your rights as a shareholder are set out in the COMPANIES ACT 1993 and in the company’s constitution. (For information on the importance of the constitution and how a company is formed, see How to form a company.)

What rights and powers can I exercise as a shareholder?

While the day-to-day management of the company is the responsibility of the company’s board of directors, the shareholders may exert a significant indirect influence by exercising the rights and powers available to them. These include:

• passing resolutions at shareholder meetings (see below)
• voting out directors
• electing to sell their shares
• exercising minority buy-out rights (this is where dissenting shareholders require the company to buy their shares: the right can give significant protection to disaffected shareholders wanting to sell and preserve their capital)
• requesting the company in writing to provide information held by the company (with a right to appeal to the court if the company refuses)
• requiring the company to provide the shareholder with a statement of the shares that he or she holds, and of the various rights, privileges, conditions and limitations that attach to those shares

Company decisions that require shareholder participation

Certain decisions about the running of the company cannot be made without shareholders participating. These include:

• various decisions requiring the unanimous assent of shareholders (see below)
• alterations to the constitution
• alterations to shareholders’ rights
• decisions involving major transactions
• decisions involving remuneration and other benefits

Shareholders may review the management of the company

Irrespective of what is in the company constitution, the chairperson of a shareholders’ meeting must allow a reasonable opportunity for the shareholders at the meeting to question, discuss, or comment on the management of the company.

In addition, shareholders are entitled to pass a resolution relating to the management of the company. However, the resolution will not be binding on the board of directors, unless the company constitution (if there is one) provides otherwise.

Shareholder meetings: ordinary resolutions and special resolutions

The powers reserved for shareholders may only be exercised at a meeting of shareholders or by a resolution passed instead of a meeting.

Shareholder powers may generally be exercised by ordinary resolution, which means a resolution passed by a simple majority. However, in certain cases shareholder powers must be exercised by "special resolution", that is, a resolution requiring a 75 percent majority. This applies where the shareholders wish to exercise their powers to:

• adopt, alter or revoke the company’s constitution
• approve a major transaction
• approve an amalgamation
• put the company into liquidation

Shareholder actions requiring unanimous assent

In addition, there are certain types of actions that shareholders may take if all entitled shareholders agree unanimously. These actions include:

• authorising dividends
• approving a discount scheme
• the acquisition by the company of its own shares
• the redemption of shares
• giving financial assistance to some other person or company to buy the company’s own shares

How do I enforce my rights in the courts?

There are a number of ways in which shareholders can take court action against the company to enforce their rights, including:

• applying for an order restraining the company from taking action that would contravene the company’s constitution or the COMPANIES ACT 1993
• applying for an order directing the company to take any action that its constitution or the Act requires it to take
• suing the company or a director for a breach of a duty owed to the shareholder
• if the company has acted unfairly or oppressively towards the shareholder, applying for an order that the company must take certain action, such as buying the shareholder’s shares or paying compensation
• applying for an order for the company’s records to be inspected

What are my liabilities as a shareholder?

As a shareholder you are not liable for the company’s obligations merely by reason of being a shareholder, unless the company’s constitution provides that shareholder liability is unlimited. If the constitution does not provide this, then your liability as a shareholder is limited to:

• any amount unpaid on a share held by you
• any liability expressly provided for the constitution
• any liability for breach of directors’ duties if the shareholders are deemed to be directors (this applies if the company gives the shareholders powers that would normally be exercised by the directors)
• any liability to repay distributions made to the shareholder when the company did not satisfy the solvency test under the COMPANIES ACT 1993, to the extent that the distribution is recoverable under the Act
• obligations to meet calls made by the company in relation to the liability attaching to shares

Former shareholders may be liable to the company for amounts outstanding in respect of any shares or for any liability provided for in either the Act or the constitution.

Cautionary notes

• Company law is detailed and can be complex. Also, frequently large amounts of money are at stake. At the earliest possible stage you should obtain legal advice as to your rights, powers, duties and liabilities as a shareholder so that your interests can be protected.
• In a number of situations the COMPANIES ACT 1993 sets out strict time limits for shareholders wanting to exercise their rights. For example, if you wish to exercise minority buy-out rights you must give the company written notice within 10 working days after the particular resolution from which you dissented.