I’m becoming a shareholder in a company, what do I need to be aware of?

Becoming a shareholder in a company can bring great rewards but it can also carry significant risk, particularly when investing a lot of cash. It is essential to be aware of your rights and obligations as a shareholder from the outset and throughout the life of your investment.

In this edition of Ask the Expert, we set out the main issues to look out for when becoming a shareholder.

Is there a shareholders’ agreement and will I be expected to sign it?

Before committing to holding any shares (which could be by investment in new shares or buying existing shares from another shareholder), you should establish whether a shareholders’ agreement is in existence and if so, examine the terms of the agreement. The rights and limitations attaching to the shares, any anti-dilution provisions and compulsory transfer provisions (all explained below) are most likely to be found in here or in the articles of association of the company. If a shareholders’ agreement does exist, it is very likely that you will be expected to sign up to its terms via a deed of adherence - this is typically a condition of the share issue or transfer.

What are the different share rights?

As a shareholder, it is important to understand the different types and classes of share, as each one can carry different rights and limitations. Shareholder can have different rights in respect of things such as entitlement to dividends, voting rights, rights to attend shareholder meetings, rights to any surplus in a winding-up, director appointment rights and rights of consent to any big decisions taken by the directors.

Some of the more common types and class of share you may come across include:

Ordinary shares

The most common type of share which carry voting rights, the right to a dividend and to any surplus if the company is wound-up.

Preference shares

Any share having a preferential right or priority over the ordinary shares.

Redeemable shares

A share which is redeemable at a future date at the option of the shareholder and/or the company.

Alphabet shares

These are usually ordinary shares which are divided into different classes in order to allocate varying rights, e.g. A ordinary shares, B ordinary shares, C ordinary shares and so on.

What protection is there from share dilution?

As a shareholder, you want to ensure that your investment is protected as far as possible and will not be diluted (or become less valuable) if the company issues more shares in the future without you having the chance to also take more shares. Anti-dilution provisions are designed to protect shareholders from this risk and should be considered before committing to any equity investment.

Can you be forced to sell your shares?

To answer this question, you need to check any compulsory transfer provisions which are typically in the form of drag-along and tag-along rights.

Drag-along rights give a certain threshold of shareholders who wish to sell their shares the power to ‘drag-along’ all other shareholders in any sale. So yes, you could be forced to sell your shares if you are subject to drag-along rights.

Tag-along rights on the other hand, can prevent minority shareholders from getting left behind on a sale as it forces the sale offer to be extended to them on the same terms.

How can we help?

Before you commit to any equity investment, our corporate lawyers can help you to understand your rights as a shareholder and explain any important provisions which you should be aware of in the articles and/or shareholders’ agreement. Call us on 0800 689 1700 or fill out the short enquiry form below and a member of the team will be in contact shortly.