Reading time: 5 minutes

As a startup founder, you likely hold a majority share in your company. When you issue shares to someone who will be a minority shareholder, there are certain rights that shareholder will want. Depending on the nature and extent of their bargaining power, they may expect more rights than others. You will typically have to negotiate the rights that you are willing to give them. This article will discuss the standard rights that minority shareholders can expect and what they mean for your startup.

Pre-Emptive Rights

Generally, a company’s shareholders will have pre-emptive rights over both shares being issued and transferred. This means shares must be offered to existing shareholders first before being issued to a third party. The existing shareholders can then request a share subscription or to purchase the shares before any third parties.

Generally, the shareholders will be able to subscribe to or purchase the shares pro-rata to their existing shareholding. If other shareholders choose to waive their pre-emptive rights, a shareholder may be able to subscribe to or purchase a greater number of shares than their respective proportion allows.

Pre-emptive rights on an issue of shares are an important right because they protect shareholders from dilution of their shareholding. This is important because shareholders with a certain shareholding percentage have specific rights. For example, the right to appoint a director. In this situation, a minority shareholder can use their pre-emptive rights to stay above that threshold. However, if they choose not to purchase the shares, or waive their pre-emptive rights, their shareholding may be diluted. 

Tag Along Rights

A ‘tag along’ right exclusively protects minority shareholders by allowing those minority shareholders to ‘tag’ along where a majority shareholder, or group of shareholders, is selling their shares. The tag along right will be set at a certain threshold (e.g. 75%). If the owners of 75% or more of the shares are selling their shares to a third party, the minority shareholder(s) can force the majority shareholder(s) to include the minority shareholder’s shares as part of that sale. This way, unless that minority shareholder’s shares are also included in that sale, the majority shareholder cannot sell their shares.

Tag along rights help protect minority shareholders who have joined a company because they want to work with the majority shareholder. Without a tag along right, the majority shareholder could sell their shares to a third party and leave the minority shareholder with a majority shareholder with whom they have not consented to work. A tag along right gives the minority shareholder the option to opt-in or out.

Right to Call a Meeting

Shareholders who hold at least 5% of the company’s shares have the right to request and call a shareholders meeting. The company’s directors must then call and arrange to hold the meeting. The company’s directors have to call this meeting within 21 days of the request. They must also hold the meeting no later than two months after the shareholder gives the company the request. 

This is an important minority shareholder right because it enables the minority shareholders to: 

  • hold the board accountable; and
  • require decisions to be discussed and changes made. 

Critical Business Matters

If a company has a shareholders agreement, it will usually contain a list of ‘critical business matters’. These critical business matters are key decisions which require a number of votes to pass. Usually, critical business matters will be decided by either a special resolution (typically 75%) of the directors or of the shareholders, depending on the nature of the decision. 

This is important for minority shareholders because it prevents one shareholder from making key decisions on their own. For example, say a company has a 60%/20%/20% shareholding structure. The 60% shareholder would be able to pass ordinary resolutions (requiring more than 50% shareholding) on their own. However, for critical business matters, the 60% shareholder would not be able to satisfy the 75% threshold on their own. They would need the agreement of at least one other minority shareholder. By requiring a majority shareholder to include them in decisions, minority shareholders enjoy more power in decision-making.

Right to Appoint a Director

The right to appoint a director is not necessarily a ‘typical’ right for minority shareholders. However, it does arise in certain circumstances, particularly where your minority shareholder is a key investor. For example, a key investor may ask for a right to appoint a director to the board. This usually comes in one of two forms. Either they have:  

  • an entrenched right to appoint a director; or 
  • a right to appoint a director if they hold a certain percentage of the company’s shares. If the minority shareholder then drops below that threshold, they will no longer have the right to appoint a director. 

The shareholders agreement will specify which kind of right the minority shareholder has. 

These rights are important because, in most companies, the directors are responsible for the company’s daily decision-making. Therefore, a minority shareholder who has a right to appoint a director has more control over the company through exercising this right.

Key Takeaways

As a founder, you will likely be issuing shares to investors or other individuals who will become minority shareholders in your company. You will need to maintain control of the company while also remaining fair to the minority shareholders. There are standard rights that most minority shareholders will expect and some rights that will depend on the nature of the shareholder. In such a case, it is up to you to negotiate those rights. A good shareholders agreement can ensure that your minority shareholders all understand their rights in the company. If you have questions about minority shareholder rights, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Maya_Lash
Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards