Shareholder Digs in his Heels – FT Q&A

The following question was published in the Financial Times on 28 July 2012 and answered by Melanie Wadsworth, a partner in the London office of Faegre Baker Daniels LLP.

Our City management company has suffered somewhat in the downturn.  It has been suggested that we release more shares to raise capital and stabilise our financial situation.  However, we have a single stakeholder with a majority who believes that we want to do this just to deprive him of his voting majority.  Do we have any legal standing to proceed?

The power of directors to issue shares is restricted by statute and may also be limited by the constitutional documents of the company.  The board would require express authority to issue more shares either in the company's articles or by way of a shareholder vote.  The issue of shares for cash is also subject to statutory pre-emption (first refusal) rights that would need to be changed so they no longer applied, either in the articles or by the approval of at least 75% of members voting on the matter.

Without the support of this majority shareholder you may have no choice other than to allow existing shareholders to follow their money.  Let us say the board has sufficient authority to issue new shares without first offering them to existing members.  Provided the directors act in good faith when issuing new shares, the majority shareholder is unlikely to have grounds for complaint. 

Even so, you may wish to consider allowing him to participate in the fundraising.  Unless substantial sums are being raised he is likely to retain a significant shareholding after dilution and, particularly when times are tough, an aggrieved shareholder can be an unwelcome distraction.