THERE ARE KEY DIFFERENCES BETWEEN LEGAL SHAREHOLDERS, AND BENEFICIAL SHAREHOLDERS.
When it comes to holding shares, it is important to be aware of the distinction between legal and beneficial shareholders. This is because there is a difference in the rights of a legal and a beneficial shareholder. It is important to have clarity over the types of shares an individual holds, and what rights are connected to those shares.
As confirmed by the Companies Act 2006, a legal shareholder is someone who has their name on the share register for a company. If a person holds shares through a broker or other intermediary, as opposed to owning those shares in their own name, then they are known as a beneficial shareholder.
There may be no difference in the extent to which a beneficial and legal shareholder may financially benefit, proportionate to their share position, from holding shares. However, this distinction between legal and beneficial holdings has implications in terms of voting rights that such individuals must be aware of.
Until an individual’s name is on the register, they are not recognised as the legal holder of those shares. It is for this reason that we encourage those who purchase or gain shares to register as quickly as possible. This could be particularly consequential at shareholder meetings.
Beneficial holders of shares do not have the right to vote at shareholder meetings, this is due to the omission of their name on the company register. This point is sometimes not understood by shareholders. In fact, it is not uncommon for a beneficial shareholder to arrive at a shareholder meeting, only to learn they do not have voting rights.
Another key difference between a legal and beneficial shareholder is that a legal shareholder may have minority shareholder protections under the Companies Act 2006, but a beneficial shareholder will not have these same protections.
Minority shareholder protections recognise that majority shareholders can simply outvote the smaller shareholders. Therefore, minority protections give advantages to such shareholders that beneficial holders of shares are not entitled to.
Common minority protections are the right of first refusal (to purchase shares put up for purchase), certain rights in relation to appointing a director, and others. The exact protections are dependent on the company’s articles of association. If the company uses model articles for example, protections such as the right to first refusal, known as the pre-emption right of share transfer, are not guaranteed.
An individual who holds shares in a number of different companies, may choose to hold them through a broker. In this scenario that individual will be a beneficial holder of those shares, however it may still be possible to give directions on how to vote at general meetings. To do this, they must proactively instruct the legal shareholder (their broker), to attend the meeting and vote. A corporate representation letter will need to be obtained.
SHAREHOLDERS – THE VIEW FROM MSP
The privacy that being a beneficial holder presents may make it an attractive option to some. Indeed, tracking down an individual who is a beneficial shareholder can be very difficult. However, the difficulty in voting at meetings and the lack of guaranteed protections that legal shareholders have, must be understood by an individual wishing to purchase shares in a company.
MSP can assist with your shareholder issues and queries – contact us.