The allocation of shares and the importance of significant control

“I own 51% of this company!”
Big Business (1988)
 
The allocation of shares amongst shareholders might not immediately seem like a dramatic area of law. Saying this, not only has it inspired the plots of countless books, shows and films over the years (most recently in the thrilling season finale of Succession), it has also led to many difficulties for companies who did not consider the importance of ‘significant control’.
 
Significant control
 
A person with significant control (PSC) over a company is usually an individual who holds more than 25% of the shares and/or the voting rights in the company (NB: there are other ways of meeting PSC status).
If the (or one of the) direct owner of a UK company is a legal entity (such as another company) and would have met one of the PSC conditions had it been an individual, it known as a registerable relevant legal entity (‘RLE’).
 
Registration
 
Knowing which shareholders are PSCs/RLEs matters because they need to be registered. In 2016, the ‘PSC regime’ was rolled out. This means that all UK companies (apart from those listed on the London Stock Exchange) are now required to keep a register of PSCs and RLEs and let Companies House know who is on it and, if it changes, when and how.

Not identifying PSCs/RLEs or notifying Companies House when they change is a criminal offence; both the company itself and any officer in default will be liable.
 
Decision-making
 
A company’s most important decisions usually need to be decided on by its shareholders, through voting at a general meeting.
The default position of a general meeting vote is that each shareholder gets one vote. However, in most cases there can be a poll system whereby the weight of each shareholder’s vote is proportionate to the amount of shares they hold.

Put simply, the higher the proportion of shares you hold, the more chance you have of decisions going your way.
 
This becomes even more important when we look at the voting thresholds that need to be met for certain decisions to be made. The Companies Act and a company’s Articles of Association (i.e. the list of rules by which it has agreed to operate) outline these thresholds.

Most shareholder decisions are made by way of an Ordinary Resolution. Unless the company’s Articles of Association state a higher percentage, an Ordinary Resolution requires at least 50% of the shareholder vote to pass.

Other decisions such as changing the company name or its Articles or rights attaching to the shares (which could have substantial ramifications, for example for the company’s directors) require what is known as a Special Resolution. Unless the company’s Articles state a higher percentage, a Special Resolution requires 75% of the shareholder vote to pass.

As such, unless the Articles specify a higher threshold, a holder of more than 25% of the company’s voting rights is able to stop a Special Resolution that it doesn’t agree with from being passed.
 
If you are:
·         incorporating a company and deciding on the allocation of shares between its owners;
·         selling shares, be that to existing shareholders, to third parties or selling back to the company
·         issuing new shares

It is extremely important to consider:
·         how many shares each holder has in relation to the other holders and
·         the voting thresholds rules in place as this translates to how much control they will have when it comes to decision-making.
 
If you wish to discuss the contents of this blog further or are looking at setting up your own business please get in touch at corporate@mlplaw.co.uk or alternatively call 0161 926 9969.