Being a Shareholder in the Age of COVID-19

Are you looking to invest in 2020? We take a look at what it means to be a shareholder during COVID-19.

The coronavirus pandemic has caused major disruptions to the UK stock market, to the point where we are now officially in a recession. The UK economy shrank 20.4 percent between April and June, compared to the first three months of the year; the biggest drop on record.

The temporary closure of businesses has dramatically affected annual trading figures. Now, profits, business plans, and budgets are having to be hastily revised, especially in the worst hit markets, including retail and hospitality. Some of the biggest banks have even been under pressure from the Prudential Regulation Authority (PRA) to suspend dividend payments and share buybacks.

So, what does this mean for investors? COVID-19 has led many companies to re-evaluate how they operate, and many shareholders will be looking to protect themselves during this volatile period, through well-crafted shareholders agreements. Today, we’ll be looking into this a little further, to picture what the shareholding market is like, and how this has changed during the pandemic.

Different Types of Shares

When a limited company is registered, it must issue at least one share, which is essentially a ‘piece’ or percentage of the business. Each share has a ‘class’ which comes with its own rights and conditions, which are usually outlined in the Articles of Association.

Generally, most limited companies will issue ‘ordinary’ shares. These usually offer equal voting rights, equal capital rights, and equal profit entitlement among its members, which suits most businesses.

However, certain companies may wish to use additional classes, which can be created during or after the company has been formed. This creates a hierarchy of different rights and powers. The other classes of shares include:

Deferred ordinary shares: no dividend is paid until the other classes of shares have received a minimum dividend.
Non-voting ordinary shares: may restrict the right to vote or carry no voting rights at all in a General Meeting.
Redeemable shares: the company has the choice to buy these shares back in future, but it must also offer non-redeemable shares.
Preference shares: will receive a fixed dividend amount every year ahead of ordinary shareholders.
Cumulative preference shares: if a company does not have enough funds to issue the fixed annual dividend, it will be paid as soon as the company has sufficient cash reserves. Ordinary shareholders will not receive their dividends until the arrears on cumulative preference shares have been paid.
Redeemable preference shares: these shares have the benefits of both preference shares and redeemable shares.
Management shares: shareholders will have multiple votes per share. These are usually issued to the first owners of the company so that they retain greater control of the business than newer members.
Alphabet shares: these are ‘ordinary’ shares that are divided up into a further class, usually ‘A’, ‘B’ and ‘C’. Each class will have different percentages of voting rights, dividend rights and capital rights.

When buying shares in a company, you should find out what the rights and conditions attached to that specific class of shares are, known as the ‘prescribed particulars’. These can usually be found in the company formation documents, which are registered at Companies House.

Different Types of Markets to Invest in

COVID-19 has had a massive impact on all sectors in the UK. Some sectors have seen a positive impact, while the majority have seen a negative impact. If you’re looking to invest, it’s important to know which to avoid during this market crash so that you don’t end up losing money.

Sectors to Avoid Right Now

According to the financial data company, Link Group, in the second quarter of 2020, 176 companies cancelled dividend pay-outs, and 30 more completely cut them. A large portion of these cuts came from the financial sector, after the Bank of England put pressure on banks and insurance companies to cancel all shareholder payments in 2020.

The oil sector also took a massive hit, with cuts totalling 2.2 billion pounds in the second quarter. Many other sectors also suffered, after the impact lockdown on their ability to operate, such as aviation, construction, engineering, retail, tourism, and hospitality.

Sectors That are Surviving

Sectors, such as tobacco, food retail, healthcare and basic consumer goods suffered less severe cuts compared to others. These sectors seem to be more resilient during a crisis and, therefore, are less likely to see cuts to dividend payments.

In fact, more than half of the companies in these sectors actually increased their pay-outs this year, compared to previous years. It just goes to show that, no matter what the situation, our basic human needs will always thrive.

If you are not really sure on where to best invest your money, then it’s important to seek advice from an independent financial expert. You should also check the Financial Services Register to check that the company you are investing in is authorised before doing anything.

How to Protect Yourself as an Investor in the Age of COVID-19

If you know where you’re going to invest and what kind of shares you’re going to buy, you also need to know what your options are to protect yourself. This may not seem all that necessary right now. That said, it will come in really handy if there are any disputes with other shareholders or directors of the company in the future. Some ways to do this include…

Shareholders’ Agreements

A shareholders’ agreement is a written document that sets out the terms and conditions of a company. It outlines how the business will be run and how shareholders can exercise their rights in relation to the company. Although it is not a legal requirement to provide this document when registering a company, it can help to iron out any disputes that shareholders and directors may come across in the future.

A well drafted shareholders’ agreement can help to ensure that all shareholders are treated fairly (both minority and majority shareholders). It will also detail how decisions are made in the company, and explains what outside parties are allowed to become future shareholders. As this document is private, unlike the Articles of Association, the document can be as bespoke as needed.

This is particularly valuable in companies where there is an equal or even shareholding, and where decisions often hit a ‘deadlock’ situation. A shareholders’ agreement can include methods of dispute resolution for various scenarios, and should always be the first port of call in the event of a shareholder dispute. It’s always best to get help from a solicitor who specialises in corporate law to help draft this document.

Articles of Association

Even if there is no shareholder’s agreement, all companies are required to register their articles of association with Companies House, under the Companies Act 2006. The articles of association set out the rules and regulations according to which the company must be run. It is effectively a contract between the company and its shareholders.

Similar to a shareholders’ agreement, the articles of association can set out rules on how to deal with shareholder disputes. This can include situations such as appointing or removing directors, what decisions require the shareholders’ approval, and the transfer or sale of shares.

Unfair Prejudice

In situations where a shareholders’ agreement or the articles of association fail to resolve a dispute, a shareholder can make a claim of ‘unfair prejudice’ to the court. It is one of the most commonly used methods used by shareholders to resolve disputes. It is up to the court to decide what is classed as ‘unfair’ and, therefore, each petition will be reviewed based on the individual circumstances.

Court action can be time consuming and expensive, and there are more cost-effective ways to resolve disputes, such as mediation. It’s also worth noting that the UK’s court system is having to deal with a massive backlog due to COVID-19, so this might not be the most economical method of dealing with a dispute.

Ultimately, to avoid anything like this cropping up, it is essential that you view the relevant registered company documents before investing in any company or becoming a shareholder in a company you helped to set up.

No One Knows What’s Going to Happen in Future…

The coronavirus pandemic is still very unpredictable and it’s likely that the markets will remain extremely volatile for some time. Some sectors are starting to see some recovery as lockdown restrictions begin to ease, but there is just no predicting what could happen in the future. Link Group believes that it could take until 2026 for dividend pay-outs to return to the levels we saw in 2019.

COVID-19 has made it clearer which markets are the most resilient, so these are worth considering first if you are looking to invest. So, although all markets will eventually recover, it’s always a good idea to get legal and financial advice before entering into any contracts or agreements.