About shareholders and their rights

Shareholders are an important part of a company. They  have an interest in the company through their shares. But, more than evidence of ownership, shares are a source of capital for companies through share sales.  Shares represent the interest that you may have in a company. 

Under Ugandan law, a share is defined as  a portion in the capital of a company or stock. Shares are property that can be transferred in a manner provided for by a company’s constitutional documents. An individual, companies, and other entities with legal personality can also own shares. 

Shareholders have different rights. They include voting rights, information rights, the ability to appoint management within a company, and an entitlement to profits of the company.  The rights assigned to shares may vary depending on the types of shares. They include ordinary shares, preference shares which create unique rights as prescribed at the time of their formation. Shares could also be issued at a premium to help companies raise income.

A company must be run in the interests of shareholders. In effect, shareholders are the owners of the company and the director’s duties require directors to act in a way that promotes the success of the company, which it has been argued, entails ensuring that the interests of shareholders are protected. Although directors have other duties to creditors, employees and other groups, directors under the company law are required to treat all shareholders equally.

In most private companies, the directors are usually the majority shareholders. This may make directors oppressive to minority shareholders.  The law requires that directors  act in the best interests of the company. However, there can be differing opinions on what “action” constitutes the best interest of the company. 

What may be in the best interests of one shareholder may not be in the best interests of another. For instance, challenges may arise on whether a company should sell part of its shares to investors and at what rate. The directors may support or block such an acquisition or takeover bid.  In most countries, courts have held that directors can block takeovers on the basis of the takeover’s impact on shareholders, customers, creditors and other considerations.  

The scope of assessing such impact can be a great cause of disagreement, especially in Uganda where we have no detailed regulations on takeovers.

As discussed above, disagreements can  arise between management and shareholders. The law and a company’s articles of association usually require  meetings as a form of accountability and decision making.   However, emerging conflicts of interest and other issues may affect the effectiveness of such meetings.

Therefore, if the Articles of Association and other company documents have not been complied with, or if there are oppressive tendencies from the management or other shareholders, a shareholder may lodge a complaint by petition to the Registrar of Companies. An action may also be maintained by a shareholder under Common Law through a derivative action in order to enforce a corporate cause of action. The Supreme Court of Uganda has backed such actions as legitimate claims to protect a shareholder’s interest.

Certainly, shareholders have an interest in the company owing to their capital contributions. These create certain rights which are transferable. As discussed, shares can be a valuable tool in the raising of capital but one must always be cautious of managing the relationship between shareholders and the management. Shareholders can assert their rights through courts and seek redress from statutory authorities.

Joel Basoga, Lawyer