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Minority Shareholder Concerns
You are taking a minority stake in a company. How do you protect yourself? What concerns should you be aware of? Learn what they are in this paper.
1.Valuation of minority shareholdings
When a minority shareholder exits a company, the general rule is that a discount is applied to the value of the minority shareholding. This discount is generally between 50 - 80% of the valuation of the company for the minority shareholding. The size of the discount will depend on the size of the minority shareholding and whether there are any agreements to the contrary.
Articles of Association of companies may contain provisions governing how valuations of minority shareholdings will be managed. In our experience, some companies will specify that a minority shareholding will be discounted whereas others will leave that to the discretion and expertise of the independent expert.
2. Tag Along and Drag Along rights
If there is a proposed sale to a third party, your position as a minority shareholder depends on whether you have any rights defined in a Shareholders Agreement or the Articles of the company.
The common right in the event of a proposed sale to a third party is the right of pre-emption. This means that if any shareholder intends to sell his shares, the selling shareholder must offer it first to all the other shareholders.
But what if you decline or cannot afford to buy those shares, what can you do or what will you be subject to? That will depend on what you have agreed in the Shareholders Agreement. The common right and obligation will be:
(a) a "tag-along" right entitling you to insist that the third party will also buy you out at the same price as the majority shareholder; or
(b)a "drag-along" right where you will have an obligation to sell your shares along with the majority shareholder to the third party. Normally, this will be at the same price per share as that for each of the majority shares.
Each of these rights has to be entrenched in either a Shareholders Agreement or within the Articles of Association to give you the rights or to impose the obligations.
3. Other minority shareholder rights
Shareholders have rights conferred by law or by contract. These rights are exercised by way of their votes. Voting rights may be calculated based on a show of hands or by their total shareholdings. Unless there is a Shareholders Agreement or the Articles of Association expressly provide, many decisions of the company will be taken either as a majority vote or as a special resolution.
A majority vote is essentially a vote taken by at least 50% of the persons present at the meeting or a voteaffirmed by persons holding at least 50% of the total shareholding in the company.
A "special resolution" is generally prescribed by the Companies Act 2006 and is a vote that must be affirmed by shareholders holding at least 75% of the total shares in the company. Hence you will hear that the "magic" figure for a minority shareholder who wants to have a "blocking vote" is 26%.
Additionally, there may be decisions that shareholders agree will be "unanimous resolutions". These are decisions that must be affirmed by all the shareholders or by the requisite percentage of the shareholders. They are prescribed by the parties themselves to ensure that minority shareholders have a greater say in how the company is managed.
Common decisions that minority shareholders will want to have a say on usually relate to the amount of debt the company intends to take on, capital expenditure, diversification of the business of the company and any rationalisation of its business. Each company may have different concerns and minority shareholders may have different concerns as well.
In conclusion, minority shareholders can negotiate for additional decision-making rightsand should ensure that such rights are entrenched both in a Shareholders Agreement and the Articles of Association. Otherwise, there is little that a minority shareholder can complain of.
As a niche commercial and IP law firm, we are regularly engaged to act in shareholder disputes and in providing advice on Shareholder Agreements. Should you require assistance with regard to any of these issues, do contact us.
For further information
If you have any further queries, contact Francesca Lee on 01865 3399360 or email fsclee@crescolegal.com.