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Do shareholders hold more powers than directors? Which powers do you have if you hold a big share in a company – especially a startup? Even experienced investors can sometimes fail to grasp the full range of rights and responsibilities they hold when committing capital to a startup. In this guide, our investment team at Bure Valley offers this overview to help bring more clarity.
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Majority & minority shareholders
At the outset, a startup’s founders will hold the majority of the shares – and thus retain control and full ownership. As they try to grow the business, however, they may look to angel investors to ask for funding in exchange for a minority stake (e.g. 10%). The founders are likely to keep majority ownership (i.e. over 50% of the shares) for at least a few years, perhaps until an IPO (initial public offering) when shares are opened up to retail investors on the stock market.
The percentage of share ownership, however, bestows special rights depending on the amount. For instance, a shareholder with over 75% holding (i.e. a startup founder in the first years) can pass special resolutions. If he/she holds less than this but over 50%, however, then they have the power to pass ordinary resolutions. These include the ability to remove or appoint directors and giving them the power to allot shares.
As an angel investor, you will likely be most concerned with your type of ownership – minority. Again, the rights available to you depend on the percentage of equity you hold:
- 5% or more. This type of angel investor can demand that a general meeting be held, and for circulation of a written resolution.
- 10% or more. In a general meeting, this investor can impose a poll vote.
- 15% or more. If there is a dispute about the variation of share class rights, this investor can make a court application to lodge a formal objection.
- 25% or more. This angel investor holds significant power. In particular, you can block special resolutions from a majority shareholder with over 75% holding.
Types of shares
Most companies only have one share type (ordinary). This provides a system of one vote per share, with each share entitled to an equal dividend right. As such, the more ordinary shares you own as an investor, the more political power you hold within the company – even if you do not control the day-to-day running.
Other companies, however, operate on a differential share system – i.e. two or more types of share. This is sometimes known as “alphabet shares”, where various share levels have a letter assigned to state their weight. For instance, those holding “A” shares will hold more rights than those with “B” shares. The rights of each shareholder, therefore, may vary according to:
- Voting rights
- Dividend entitlement
- Capital rights
- Special rights (e.g. appointing / removing directors).
This can lead to quite a confusing portfolio for an angel investor, since his/her shareholder rights may not be the same across all of their startup investments. For instance, you might hold 10% equity in Company X which predominantly consist of “B” shares. Yet you may find that you hold more power over Company Y, where you hold 5% equity comprising “A” shares!
To manage startup shares effectively, therefore, some angel investors only choose to invest in businesses offering ordinary shares. Others may choose to include investments in companies which include B, C and other “lower-level” shares, but keep a set of digital folders which allows them to easily keep track of everything (e.g. the shareholder rights of each one).
Annual general meetings
Under UK law, public companies must hold an annual general meeting (AGM) of shareholders every six months. For angel investors, however, the private companies they are invested in are not obliged to do so – although they can elect to do so. These meetings are often highly useful for checking on business progress and addressing any issues, including:
- Appointing / re-appointing auditors of the company.
- Establishing the company dividend
- Reviewing and confirming the business accounts and its report
- Reviewing and changing to the company’s articles of association.
- Removing directors / auditors.
A physical AGM is not required. The Companies Act 2006 states in section 360A that: “persons who are not present together at the same place may be electronic means attend and speak and vote at it.”
Conclusion & invitation
Shareholder rights, as you can see, are far from straightforward. The rules can become quite complex and are also subject to change as the government updates legislation in line with new policy and technological advancements. Angel investors would likely benefit from a professional who can advise them about shareholder rights.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827