Share Sale/Purchase: Is Shareholders’ Approval Required?
Baher Saleh
International Associate
Introduction – Is there any legal obligation for shareholders to approve the sale or purchase of shares?
Generally, there is no mandatory legal obligation for shareholders to approve the sale or purchase of shares when the parties involved are private companies. However, in certain situations, such approval might be necessary. This typically applies in the following instances:
- The transaction is classified as a substantial property transaction as defined under sections 190 to 196 of the Companies Act 2006.
- The company’s articles of association or an applicable shareholders’ agreement require shareholders’ approval.
The Meaning of Substantial Property Transactions
A transaction requires the approval of the shareholders of the buyer or seller if it qualifies as a substantial property transaction under sections 190 to 196 of the Companies Act 2006.
In essence, a substantial property transaction involves a company either buying or selling a substantial non-cash asset to or from the following:
- A director of the company or its holding company.
- Any individual or entity connected with a director of the company or its holding company.
An asset is non-cash and substantial if it exceeds £100,000 or 10% of company assets and over £5,000.
If the company completes a substantial property transaction without obtaining the required shareholder approval, the transaction may become voidable. Additionally, the directors involved must account for any direct or indirect gains and indemnify the company for any resulting loss or damage.
Consent Required Under Articles or Shareholders’ Agreement
Typically, a company’s board of directors is responsible for making transactional decisions. It’s unusual for a company’s constitution or shareholders’ agreement to mandate shareholder approval for entering into share sales or purchases as part of regular business activities.
However, if the transaction significantly alters the nature of the business or involves a holding company disposing of most, if not all, of its assets and business, the articles of association or relevant shareholders’ agreement might stipulate that such transactions require prior shareholder approval. For instance, a provision could specify that:
- The sale of a significant subsidiary must be approved by shareholders holding at least 75% of the voting shares entitled to vote at a general meeting.
- The consent of one or more key shareholders might be necessary for certain transactions, often seen in joint ventures or multi-party investments where a leading shareholder plays a decisive role in critical business decisions.
Review the articles of association and shareholders’ agreements to check for any shareholder consent requirements for corporate transactions.
Conclusion
In conclusion, while shareholder approval is generally not required for share sales or purchases in private companies, there are key exceptions. Substantial property transactions under the Companies Act 2006 and specific provisions in a company’s articles of association or shareholders’ agreements may necessitate such approval. Always review your company’s governing documents and seek legal advice to ensure compliance and protect all parties involved.
Disclaimer: This Article is Not Legal Advice
This article explains scenarios where shareholders must approve a share sale or purchase transaction. However, do not treat this as legal advice. Every company faces different circumstances, so always seek personalised guidance from a qualified legal expert. This article is for information only and should not replace professional legal advice.
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