A shareholder is a person who owns a minimum of one share in a company with share capital (e.g. a company limited by shares). Depending on the types of shares they own, shareholders can vote on certain corporate matters and receive dividend payments from company profits.
Below, we explain exactly what it means to be a shareholder, including the rights and responsibilities of the role, who can own shares, and how to add or remove shareholders from a UK limited company.
What is the role of a company shareholder?
Shareholders are individual people or corporate bodies who own a stake in a limited company. Upon taking one or more shares, the person becomes a ‘member’ of the company.
If and when the business makes a profit, members are entitled to a portion of those profits relative to the percentage value of their shareholdings. These profits are paid to members in the form of dividends.
However, the role of a company shareholder is about more than receiving profits. Whilst they are not responsible for managing the day-to-day affairs of the business, shareholders do have certain duties to fulfil, including:
- Appointing directors to run the company on their behalf
- Deciding which powers to grant directors in the articles of association and service agreements/employment contracts
- Setting director remuneration
- Ensuring the board of directors performs its functions and duties effectively
- Removing directors from office when required
- Authorising the allotment (issue) of new shares
- Reducing the company’s share capital
- Approving major transactions
- Making decisions on company governance and policy
- Authorising changes to the company’s constitution (articles)
- Approving directors’ loans
To make any such decisions, shareholders must pass a resolution, either at a general meeting or by written resolution. There are two types of company resolutions available to members:
- Ordinary resolution – passed by a simple majority (over 50%) of votes in favour of the motion. This is used for routine matters.
- Special resolution – passed by a majority of at least 75% of votes in favour of the motion. This is used for more exceptional matters.
Some companies may prescribe different decision-making procedures and requirements in their articles or a shareholders’ agreement, such as a higher majority or unanimous agreement for passing resolutions.
Shareholders’ rights
The rights of shareholders are set out in the Companies Act 2006, the articles of association, and any shareholders’ agreement the members put in place.
As members of the company, shareholders are entitled to make decisions on matters beyond the scope of the directors’ powers, receive copies of annual accounts, inspect company registers, and request an audit.
Under the Model articles of association, shareholders also have pre-emption rights on the allotment of new shares, but not on the transfer of existing shares.
Other rights are determined by the ‘prescribed particulars’ attached to their shares, as defined in the Companies (Shares and Share Capital) Order 2009.
Some companies choose to vary the rights of shareholders by issuing different types of shares. However, most private companies issue only ‘ordinary’ shares.
This type (‘class’) of share provides the following rights per share:
- one vote at general meetings
- equal dividend payments
- equal capital if the company is wound up (closed)
- option to exchange (‘redeem’) the share for money
The legal rights of shareholders are largely limited in the Companies Act and Model articles. Therefore, in companies with more than one shareholder, bespoke articles and/or a well-drafted shareholders’ agreement are key to bolstering the rights of all members, especially minority shareholders.
Are shareholders the owners of a company?
The notion of ownership with regard to companies is a complex one, because a company exists as a legal person in its own right.
Shareholders are the beneficial ‘owners’ of a company insofar as they own stock (shares) in the business. These shares entitle them to a portion of future company profits and the right to make certain decisions.
However, in contrast with the general concept of ‘ownership’, shareholders do not own the company’s assets. They cannot use, borrow, sell, or give away any assets of the business for personal gain, nor do they have the right to manage the company.
The assets of the business belong to the company itself, and the board of directors make the majority of corporate decisions on behalf of shareholders for the benefit of the company.
Are shareholders responsible for company debts?
The shareholders of companies limited by shares have limited liability for the debts and actions of the business.
As per the Model articles of association, the liability of shareholders “is limited to the amount, if any, unpaid on the shares held by them.”
This means that, generally, their personal responsibility to contribute toward company debts is limited to the amount of money they have agreed to pay for their shares.
Most shares have a nominal value of £1. This is the sum that the shareholder agrees to pay, either at the time of taking the shares, or at a later date upon the request of the company.
Should the company become insolvent and be unable to settle its debts, the only money a shareholder risks losing is the amount they have already invested in the business, or the amount unpaid on their shares.
However, there are some exceptions to this rule. For example, a shareholder may be personally liable if they provide a personal guarantee for a company loan, or they engage in fraudulent or illegal activity that harms the business or its creditors.
Can anyone be a shareholder?
Almost anyone can be a shareholder in a company with share capital, including:
- Individuals
- Groups of two or more individuals
- Companies limited by shares or limited by guarantee
- Unlimited companies
- General partnerships
- Limited liability partnerships (LLPs)
- Limited partnerships (LPs) and Scottish limited partnerships (SLPs)
- Organisations
- Charities
- Institutions
There is no minimum age requirement, which means that even minors (persons under the age of 18) can hold shares in a company. Issuing or transferring shares to children is not unusual in small family-owned businesses.
Can a director be a shareholder?
Whilst the two roles are entirely different, a director can also be a shareholder in the same company. This is commonplace in many limited companies, both private and public.
It allows individuals to set up a company on their own as a sole director and shareholder, or form a company with one or more other people.
Can a disqualified director be a shareholder?
A disqualified director can be a shareholder. However, whilst company law does not prevent ownership, the individual must exercise caution to avoid breaching the terms of their disqualification order.
Any person who is banned from being a company director is prohibited from being involved in the formation, marketing, or running of a company, either directly or indirectly, without the express permission of the court.
Such restrictions could pose serious problems if a disqualified director were to hold more than 25% of the voting rights in a company through their shareholdings. In this situation, they would be deemed a ‘person with significant control’ (PSC), thus having the power to exert influence or control over the running of the company.
Moreover, if the sole director and shareholder of the company was a disqualified director, they would not be legally permitted to maintain their existing status during a period of disqualification, which can last up to 15 years.
For the company to continue, they would have to appoint a new director to run the business. They would not be permitted to directly or indirectly influence the company’s decision-making in any way, but they could work for the company as an employee and continue receiving dividends from shares.
However, the company would have to alter its shareholdings accordingly, to reduce the disqualified director’s voting rights to below 25%. This could be achieved by transferring at least 75% of their shareholdings to one or more other people.
Alternatively, the company could transfer at least 25% of the disqualified director’s shares to one or more other people and redesignate the remaining 75% as non-voting shares. This would remove the PSC element, whilst allowing the disqualified director to continue receiving most of the profits from the business.
Another option would be to dissolve the company and transfer the business to a sole trader structure. There are no restrictions on disqualified directors operating as sole traders.
Can a company secretary be a shareholder?
A company secretary can be a shareholder in the same company. In fact, in some firms, the same person may be a director, company secretary, and shareholder at the same time.
Difference between a shareholder and a director
Shareholders and directors have very distinct roles in a company, even though the same person (or multiple people) can hold both positions at the same time.
A shareholder owns one or more shares in a company. Depending on the rights attached to their share(s), they are entitled to make decisions on exceptional matters affecting the company, exercise control over the management and direction of the business, and receive some or all of the profits.
A director, on the other hand, is someone who is appointed by the shareholder(s) to oversee day-to-day operations, make everyday business decisions, and promote the success of the company on behalf of members.
Difference between shareholders, members, and subscribers
The terms ‘shareholders’, ‘members’, and subscribers’ are often used interchangeably, but it is important to understand their different meanings.
A shareholder is a person who owns at least one share in a company with share capital (e.g. a company limited by shares). Upon taking at least one share, the shareholder becomes a member of the company and has their name entered in the register of members.
The term ‘member’ applies to any person who is a shareholder in a company limited by shares, a guarantor in a company limited by guarantee, or a partner in a limited liability partnership or limited partnership.
Subscribers, on the other hand, are the first members (e.g. the founding shareholders) who agree to form a company, become members, and enter their names on the memorandum of association during the company formation process.
Therefore, all shareholders and subscribers are members, but not all shareholders and members are subscribers.
Are shareholders also ‘people with significant control’ (PSCs)?
Some shareholders are also classed as people with significant control (PSCs), depending on their percentage of shareholdings or voting rights.
To be a PSC, a shareholder must satisfy at least one of the following ‘nature of control’ conditions:
- Hold more than 25% of shares in the company
- Hold more than 25% of voting rights in the company
- Have the right to appoint or remove the majority of directors
- Have the right to exercise, or actually exercise, significant influence or control over the company
It is therefore possible to be a shareholder without being a PSC. For example, a minority shareholder with less than 25% of the company’s issued shares and voting rights.
Difference between a shareholder and a stakeholder
People often confuse these two terms and assume that shareholders and stakeholders are one and the same. This is incorrect.
Shareholders own shares in a company, whereas stakeholders are internal or external third parties who have a vested interest in the performance and success of the business.
Examples of stakeholders include company employees, clients, suppliers, lenders (e.g. banks), donors, volunteers, HMRC, the community, and people who benefit from the services that the company provides.
Difference between shareholders and guarantors
Shareholders are members of a company limited by shares, whereas guarantors are the members of a company limited by guarantee.
Guarantors do not hold shares because limited by guarantee companies do not have share capital. They control the company but do not have an ownership stake in the business.
How to add a new shareholder to a company
When you set up a company, you must have at least one shareholder and provide their details on the company formation application form.
After incorporation, you can add new shareholders to the company at any time by transferring existing shares or issuing new shares.
You must provide the new member with a share certificate and enter their details in your company’s register of members – and the register of people with significant control (PSC register), if applicable.
Additionally, you must provide Companies House with the details of any new shareholder or PSC when you file your next confirmation statement.
How to remove a shareholder from a company
When an existing shareholder leaves a company by transferring all of their shareholdings, you must update the register of members with the date on which they ceased to be a member.
You will also need to provide Companies House with the details of any new shareholder or PSC when you file your next confirmation statement.
Keeping shareholders’ details up to date
Shareholders’ details must be kept up to date in the statutory register of members. This register should include the following information about every member:
- Full name
- Service address (required only for subscribers)
- The date on which the person became a member of the company
- Details of shareholdings
- The date on which the person ceased to be a member of the company (where applicable)
The register should be stored at the company’s registered office, a single alternative inspection location (SAIL address), or on the public register at Companies House.
Thanks for reading
If you have any questions about this topic or need advice on setting up or running a limited company, please comment below or contact our company formation team.
