Bizstartup.ie - We have a shareholder with 20pc of our company’s shares who has never put money into the company. Can the two directors dilute out his shareholding by simply issuing more shares?

Under law, all shareholders must pay the nominal value for their shares upon their allotment.  There is no particular requirement to pay share premium on an allotment and the fact that the shareholder has not invested funds or done any work for the company is not relevant to his holding of the shares in the company once he has paid at least nominal value for the shares when they were allotted.

There is also no obligation for the shareholder to subscribe for further shares in the company even if he has pre-emption rights.  However, his shareholding could be diluted in the event that he waived such rights.

As I understand it, there are no pre-emption rights on the allotment of shares under either the Articles of Association, the shareholders agreement or otherwise.   Have the statutory pre-emption rights under Section 23 of the Companies (Amendment) Act 1983 been excluded from the articles? 

On the basis that such statutory pre-emption rights have been excluded, it would appear there is no restriction on the allotment of shares by the directors assuming they have the necessary authority under Section 20 of the Companies (Amendment) Act 1983.

In order to allot shares in a company, the allotment must be approved by the board of the directors and such allotment must be from authorised but unissued share capital which is free from pre-emptive rights.  I understand that the shareholder is not a director of the company and accordingly cannot object to such allotment at board level.

Notwithstanding the above, the excluded shareholder could take a derivative action for minority oppression against the company under Section 205 of the Companies Act 1963 and claim that the affairs of the company "are being conducted or that the powers of the company are being exercised in a manner oppressive to him" or "in disregard of his or their interests as members". 

A claim for minority oppression is expensive and the remedies are discretionary but include ordering a share purchase by the petitioner or oppressor,  amending the articles of association and the winding up the company.  It is not clear from the information provided whether he would have any grounds for making such a claim."