BDB Law: Angel Investing: balancing the rights of majority and minority shareholder

An Angel investing significant sums of their money in a business would want to retain as much control as possible, but spare a thought for the entrepreneur who founded the business and now being asked to give up a majority stake in the business.

Angel backed businesses are typically structured so that there is a combination of minority shareholding (i.e. representing those who hold less than 50% of the shares) and a majority shareholding (i.e. more than 50% of the shares). There may also be those holding shares equally (e.g. two minority shareholders holding 25% shares each).

As to whether an Angel is a minority or majority shareholder depends on many factors including:

• amount of investment an Angel is looking to make;
• negotiation power of the parties; and/or
• whether there are any restrictions contained in any existing shareholders agreement.

The law does not distinguish between minority and majority shareholder rights and treat them equally, unless the parties agree otherwise. Therefore the balance reached by default between the respective rights of shareholders may not be an appropriate one for every situation.

A minority shareholder may have concerns about:

• losing a seat on the board;
• unilateral changes to the nature of the business;
• their shares being diluted through the issue of new shares; and
• right to ‘tag’ along if a majority shareholder sells their shares.

Minority shareholders would be keen to address some of the above issues to ensure their rights are protected and they are not completely driven-out by the majority shareholder. This can be achieved by ensuring certain key decisions of the company are only taken by the unanimous vote of the shareholders. A majority shareholder should be willing to accept some of these points, especially if the parties are to get along and work together.

Shareholders agreement, away from prying eyes

Shareholders agreements are a private document between the shareholders of the company, whereas the articles of association are publicly available from Companies House. Therefore sensitive information relating to the company, such as specific rights reserved for certain shareholders, should be documented in the shareholders agreement and not in the articles.

The shareholders agreement should contain details relating to the operation and running of the company. The level of detail should be far more than that contained in the articles. For instance, it would be unusual to see a mechanism to resolve shareholder disputes in the articles but it makes sense to include it in the shareholder’s agreement.

At Bircham Dyson Bell, we have prepared a template shareholders agreement which is populated using a questionnaire. The agreement is balanced and considers the parties involved (e.g. minority and majority shareholders). For further information or assistance in negotiating and/or drafting a shareholders agreement or discussions about our template agreement or for general corporate advice, please contact either Guy Vincent (GuyVINCENT@bdb-law.co.uk) (Partner) or Youichi Iisaka (YouichiIISAKA@bdb-law.co.uk) (Solicitor) at Bircham Dyson Bell LLP on 020 7227 7000.