Veto Rights

Shareholders Agreement

Decisions to which all shareholders must agree

Most company decisions are made by majority. That means if you hold more than 51% of the shares in a company then your wishes will normally prevail. The same is true if two or more shareholders club together in relation to a decision. If together they hold more than 51% of the shares in the company then their collective wishes will normally prevail. Minority shareholders have very limited influence over the activities of the company.

Minority shareholders (who hold less than 50% of the shares in the company) should recognise that not all decisions will be made in accordance with their wishes, such is the nature of going into business with others. However, some decisions are so important that minority shareholders should demand that their consent be obtained ? in other words they should demand a veto.

A shareholders agreement recognises that there are certain decisions which are so important that all of the shareholders must agree on the appropriate course of action. Requiring unanimous consent is a benefit to minority shareholders, who may not otherwise have any influence over those decisions. A shareholders agreement can contain a list of those decisions and set-out a procedure for seeking the agreement of the shareholders. The longer the list of important decisions, the better the protection for minority shareholders.

In summary, a shareholders agreement can amend the default decision making process of a company, making it fairer to the minority shareholders.

The list of decisions which require unanimous shareholder approval would be negotiated by the shareholders when entering into a shareholders agreement. Common examples include:

  • Fundamentally changing the business activities of the company. A clear example of this would be an estate agent company opening a video store.
  • Permitting the company to take out a large loan.
  • Hiring or firing a director.
  • Giving a director a pay rise or imposing a pay cut.
  • Issuing more shares in the company.

 

One note of caution. The longer the list of matters which require the consent of all shareholders, the more difficult it is to run the company. Taken to the extreme, if every decision required unanimous consent, the company would grind to a halt. Particularly if one shareholder is being difficult.
Rather than require the unanimous approval of certain decisions, it is possible for a shareholders agreement to require shareholders holding a set percentage of the shares to approve a decision – say 90%.