Law Firms In SAARC

‘A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company’- explain and illustrate.

Introduction

Shareholder means a person who won a share or more than a share in a company. Shareholders are formally called member. A shareholder may also be referred to as a stockholder. According to Wikipedia, ‘A shareholder or stockholder is an individual or institution (including a corporation) that legally owns one or more shares of stock in a public or private company. Shareholders own the stock, but not the company itself (Fama 1980) Shareholders are granted special privileges depending on the class of stock.’ *

In another way we can say that one who owns shares of stock in a corporation or mutual fund. For corporations, along with the ownership comes a right to declared dividends and the right to vote on certain company matters, including the board of directors also called stockholder.

Rights of shareholders:

These rights are:

§                     The right to sell their shares

§                     The right to vote on the directors nominated by the board

§                     The right to nominate directors (although this is very difficult in practice because of minority protections) and propose shareholder resolutions

§                     The right to dividends if they are declared

§                     The right to purchase new shares issued by the company

§                     The right to what assets remain after a liquidation

Footnotes:

*Stockholders or shareholders are considered by some to be a subset of stakeholders, which may include anyone who has a direct or indirect interest in the business entity. For example, labor, suppliers, customers, the community, etc., are typically considered stakeholders because they contribute value and/or are impacted by the corporation.

Shareholders in the primary market who buy IPOs provide capital to corporations; however, the vast majority of shareholders is in the secondary market and provides no capital directly to the corporation.

Therefore, contrary to popular opinion, shareholders of American public corporations are not  the (1) owners of the corporation, (2) the claimants of the profit, or (3) investors, as in the contributors of capital.

Majority shareholder:

The majority shareholder is the person who owns most of the shares of the company. That means he/she has more powers than the other shareholders. A majority shareholder can be a person most often in the case of a company founder. This situation is mostly common in private companies other than public companies.

But if a person own fifty percent ownership of the company the shareholder would not have the right to use the company’s property, building, materials and equipments. This happens because the company is considered as a legal person. In this case the shareholder has the rights in regards to the company he/she invested in. A majority share holder can cast the majority of votes at a general meeting of a company. They control all important aspects of running the company. The majority shareholder is not supposed to manipulate her authority for unfair personal benefits.

The majority shareholder is most commonly the company’s parent but may also be an individual or a group of connected shareholders. This is more common with smaller companies and in emerging markets.

“Majority shareholders often wish to act in ways that may disadvantage the minority. For example, it may be in the majority’s interest to obtain complete control of a company by acquiring the minority’s shares. Alternatively, the majority may want to increase their control without expropriating the minority’s shares. The majority may wish, for example, to exclude the minority from participation in future rights issues. In these kinds of situations, however, there is likely to be considerable uncertainty as to the risks that the exercise of the majority’s power will be open to challenge by the minority. By providing distinct practical advice this book will assist majority shareholders in exercising their power, to enable them to avoid successful challenges brought by disgruntled minorities.”(The Law of Majority Shareholder Power Use and Abuse, 1st Edition, edited by David Chivers and Ben Shaw) *

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Footnotes:

*The book considers, firstly, different ways in which majority shareholders may exercise their power to expropriate shares from minority shareholders. It then analyses each of these methods and suggests ways of reducing the risks that such actions of these methods may be challenged by disaffected minorities. Methods of expropriation included in this section include:

  • the introduction of expropriation provisions into a company’s articles of association
  • schemes of arrangement under s 425
  • compulsory acquisition of shares under ss 428-430.

Further, the authors consider ways in which majority shareholders may control minority shareholders without expropriating shares from them. Topics in this section include the majority’s power to vary rights attached to the minority’s shares and to exclude the minority from participation in rights issues.

Finally, the book discusses a variety of other topical issues that are relevant to majority control, for example, the extent of the majority’s power to ratify wrongs they have committed against the company and the majority’s power to limit dissent at company meetings.

This work provides an invaluable reference guide to anyone advising majority shareholders. It is the first of it kind to concentrate on offering practical advice to majority shareholders on ways of minimising the risk that their actions are being challenged.

Top of Form

Minority shareholder:

Minority shareholder means a shareholder holding less than fifty percent or minor shares in a company that is controlled by majority shareholder or a shareholder whose proportion of shares is too small to confer any power to exert control or influence over company action.

Minority shareholders are often effectively deprived of any real say in the running of the company, and they may find that the company is run in a way which benefits the majority at their expense.

The minority may have more shares, but lack control due to how the company is structured: for example, they may include non-voting shareholders. Although legal protections exist against this danger, they are not always effective. A majority shareholder can not cheat the minority. The disadvantages to minority shareholders are also the reasons, why prospective majority shareholders are willing to pay a control premium.

So we can say that minority share holder is a equity holder of a firm who does not have the voting control of the firm, by virtue of his or her below fifty percent ownership of the firm’s equity capital.

Shareholders rights in Thailand’s perpective:

Shareholding % Control

Remarks
Shareholder own more than 75% of the shares Give the shareholder an absolute control over all the decisions to be made at the shareholders meetings in accordance with the law.
Said shareholder will be able to pass not only ordinary resolutions but also special resolution on its own
This table is based on the following assumption:

(1)            All the shareholders of the company are represented at the meeting.

(2)            The company does not have preference shares with special voting rights

(3)            The company does not have special articles of association or there is no shareholders agreements that grants additional rights to minority shareholders

Special Resolutions of a Shareholders Meeting are resolutions about the following matters:

–  amend the articles of association;

–  amend the memorandum of association;

–  increase the capital, reduce the capital;

–  pass a resolution to place the company in liquidation,

–  Pass a resolution to merge the company with another company.

Shareholder own more than 50% of the shares, but less than 75% Give this shareholder the power to pass any ordinary resolutions at shareholders meetings. In other words this shareholder can run the ordinary business of the company on its own.

This shareholder may not pass special resolution without the agreement of other shareholders

In this table we only discuss the right of vote of the shareholders at a shareholder meeting.

Shareholders have other rights that do not depend from their percentage of ownership but that are inherent to their shares.

For example a shareholder may take legal action against a Director of the company that violates the duties imposed to him by the law.

If the company refuses to takes action against such Director any shareholder may do so.

Shareholder own more than 25% of the shares but less that 50% This shareholder has the:

–   Right to require the company to convene an extraordinary meeting of shareholders;

–   Right of the shareholder to block special resolutions

Shareholder own more than 20% of the shares but less than 25% This shareholder has the:

–   Right to require the company to convene an extraordinary meeting of shareholders;

–   May not otherwise influence the decision of the shareholder meeting

Shareholder own less than 20% of the shares This Shareholder may not on its own requires the company to convene a shareholder meeting and may not influence the passing of any special resolution or ordinary resolution

According to UK’s company perspective:

A company can have any number of shareholders (also known as members) holding any number of shares. There must be at least one shareholder, as a company cannot exist without a share capital. Sole shareholders are allowed in private companies.

As with directors and the company secretary, this becomes a matter of public record and there are specific rules regarding the transfer of shares between shareholders.

There is no stamp duty payable on allotments of new shares, but stamp duty is payable in most circumstances when transferring shares from one shareholder to another. Shareholders can be resident anywhere in the world and can be of any nationality.

In general, the rules regarding shares are quite complex, although with the vast majority of companies, there is little to consider other than the initial allotment of shares, which may not change from year to year.

One of the most frequently asked questions is “what is the usual share structure for a new company”. There is no strict formula to follow. In simple terms, the shareholding of a company determines its ownership, and this is usually structured very easily. If your company is to be wholly owned by yourself, you need only have a single share issued in your name to begin with. Alternatively, should you wish to spread shares amongst various family members or investors, an allotment of 100 shares may give the flexibility required. Larger numbers of shares can be issued to shareholders who introduce capital into the company, reflecting their financial investment. High levels of capital are sometimes, although rarely, introduced at the outset in order to demonstrate high levels of capital commitment to encourage confidence in the company on the part of potential lenders or suppliers. However, please note that in the event of failure of a business, a shareholder may be responsible for any amount outstanding on shares registered in his name that are not fully paid at the date of receivership. Therefore it is not advisable to allot large numbers of unpaid shares at the outset.

The number of shares that can be issued in a company is unlimited unless restricted by the articles.

The Companies Act 2006 abolishes the concept of Authorised Capital, so that shares only exist when allotted.

It is sometimes necessary to maintain confidentiality of the identity of shareholders, and to enable this, Company Registrations Online can provide nominee shareholders to whom shares can be registered. In these circumstances, a confidential declaration of trust is signed by our nominees, ensuring the beneficial owner maintains control of the shares.

Agreement of a shareholder:

A shareholder Agreement is a document that every company with more than one shareholder should have. It contains the rules by which the ownership of a company is held and in general terms:

  • provides a basis for the resolution of disputes
  • confirms the powers of the shareholders in the company
  • prevents the situation where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company
  • sets out the limits and procedures for how the company is to be operated

Whilst it doesn’t replace the Articles of Association, a Shareholder Agreement could be of crucial importance in any company where there is more than one shareholder. This may be even more significant where shareholders are also family members as the ever-increasing divorce rate indicates! The agreement is there to ensure that decisions are taken by consensus and discussion rather than unilateral imposition. It will provide clarity and certainty as to what can or cannot be done, resulting in a reduction of the areas in which there might be conflict, and most importantly provides a framework for dispute resolution, exit strategy for disaffected shareholders, and resolution of shareholdings in circumstances such as divorce or death of other shareholders. All these factors can cause untold difficulties if the shareholders do not make sufficient provision.

By having a Shareholders’ Agreement situations where changes in one shareholder’s personal circumstances can have an effect on the company or other shareholders within the company are prevented.

A Shareholder Agreement provides a level of protection for the parties involved in the ownership of the company against the actions of the others, whether minority, majority or equal shareholders.

Shareholders typically rely on common sense and tolerance of others to resolve matters; they may well be married, family members or long-term friends. In either situation anything that can be done to reduce the possibility of conflict is a good thing. A formal agreement prevents an impassable obstacle if things go wrong in the future.

It is common for a newly formed company to be run in the initial stages more like a Partnership. This however is not a suitable basis on which to continue operation as it grows and matures; there is a need for structure and a Shareholders’ Agreement is one of the cornerstones of the company.

While there is a lot to consider when starting a new company, it is prudent to take a longer-term view for the future. The mere formation of a company is relatively simple to achieve and allows one to start trading, it does not however confirm what responsibilities and more particularly the limits of responsibilities of the shareholders (owners) are.

A Shareholder Agreement will remove and resolve some common potentially damaging issues as follows:

  • Common sense and tolerance may not be enough to end a dispute and specific agreed actions are called for. A Shareholder Agreement will force an end to a dispute, by providing a structure within which the parties have to abide, in the event of a stalemate situation being reached, then a Shareholder Agreement will provide a dissolution procedure to allow the parties to go their own ways.
  • The spouse of the shareholder may take his/her place. A Shareholder Agreement will provide a mechanism by which the other shareholders have first right of refusal to purchase the deceased’s shares.
  • Without a Shareholder Agreement you may – this may not be in the best interests of the company. A common provision is a right of first refusal. This means that if a shareholder obtains a commitment from an outsider to purchase shares, the shares have to be offered under the same terms to the existing shareholders for a specified period. If the other shareholders do not want shares to go to the outsider, they merely have to match the price and purchase.
  • Without a formal Shareholder Agreement, it is possible for your fellow shareholders to agree a contract on behalf of the company no matter what the terms. With an Agreement in place this cannot happen or it will not be binding on the company as the person in question will have exceeded their responsibilities. Having control on an individual’s ability to acquire commitments on behalf of a company is of paramount importance, to ensure the smooth and profitable running of the company.

According to Bangladeshi Comapany law:

The rights of the shareholders (including the holders of AIM Securities) of the Company are included in the Bangladesh Companies Act 1994, the Bangladesh Securities and Exchange Ordinance 1969 (together with the Bangladesh Securities and Exchange Commission Act 1993 and the rules made thereunder) and the rules of the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE); and the Company’s Articles of Association.

Shareholders’ Meetings
Resolutions to be proposed at shareholders’ meetings are classed as either ordinary (requiring a bare majority in number of shares held by persons who attend and vote at the meeting), or special or extraordinary (both requiring a 75 per cent. majority in number of shares held by persons who attend and vote at the meeting).

Bangladesh Companies Act, 1994 requires at least 14 days’ notice to be given to shareholders to call an Annual (or Ordinary) General Meeting (or 21 days if special or extraordinary resolutions are to be proposed at such meeting) and 21 days’ notice for an Extraordinary General Meeting.

An Annual General Meeting of the company must be held once per calendar year and no more than fifteen months after the previous Annual General Meeting. Shareholders should be sent the audited accounts of the company together with directors’ and auditors’ reports thereon, proposed to be laid before such Annual General Meeting together with the notice convening such meeting. Further, the Annual General Meeting of a listed company for a year is required to be held within six months of the company’s year end.

As in the UK, the holders of not less than one tenth of the issued share capital of a company have the ability to requisition an extraordinary general meeting.

A shareholder has the right to receive notice of a shareholders’ meeting; attend such a meeting; and raise an issue related to the businesses conducted at any such meeting.

At any general meeting:

1.                              on a show of hands, every member who is present in person shall have one vote; and

2.                              on a poll, every member who is present in person or by proxy has one vote for every share of which he is the holder.
The quorum for a Shareholders’ meeting is five persons entitled to vote and present in person. A proxy representing a Shareholder which is a company may not vote unless his appointment as proxy has been approved by a resolution of the directors of the appointing company, which resolution remains in full force and effect at the time of the meeting.

Financial Disclosures
Under the Bangladesh Securities and Exchange Rules, 1987, Bangladeshi listed companies are obliged to prepare annual audited accounts, audited by a chartered accountant, and to send such accounts to the Bangladesh SEC, the relevant stock exchanges and all shareholders of such company at least fourteen days prior to holding of its AGM.

These financial statements, in addition to the requirements of the Securities and Exchange Rules, 1987 and the Bangladesh Companies Act 1994, are required to comply with the International Accounting Standards as adopted by the Institute of the Chartered Accountants of Bangladesh. In auditing these financial statements, the auditors are also required to conduct their audit in conformity with the International Standards of Auditing as adopted by the Institute of the Chartered Accountants of Bangladesh.

Further, the Bangladesh Securities and Exchange Rules, 1987 require Bangladeshi listed companies to prepare half-yearly accounts, which do not have to be audited, but do have to be sent to the Bangladesh SEC, the relevant stock exchanges and all shareholders of such company. The half-yearly accounts must contain a balance sheet, profit and loss account and cash-flow statements prepared in the same way as the annual audited accounts are prepared, and must be sent within one month of the half-year end.

Also, a listed company is subject to continuing disclosure requirements pursuant to the Listing Regulations of the DSE and the CSE. Accordingly, a listed company is required to inform the Bangladesh SEC, the DSE and the CSE immediately of any ”price sensitive information” (as defined above).

In addition, a listed company must notify the Bangladesh SEC, the DSE and the CSE of the following:

any change in its board of directors; and any change in the holding of each director, officer and/or other shareholder of the company who is or has been the legal owner of ten per cent. or above of any class of the company’s listed securities at any point of time within seven days of such change; and
Every transfer of share by the company’s sponsors (including every director, promoter and officer) within seven days of such transfer.
Protection of Minority Interests
Minority shareholders who feel that the Company’s affairs are being conducted in a manner prejudicial to their interests may apply to court for relief in a procedure analogous to that contained in the UK Companies Act 1985.

Enquiries into the Company’s Affairs
The holders of not less than 5 per cent. Of the issued share capital of a Bangladeshi listed company can petition to the Bangladesh SEC to make enquirers into the affairs of the company in which they hold shares, or its business and transactions, under the Bangladesh Securities and Exchange Ordinance 1969. If the Bangladesh SEC decides to investigate, it has the power to require the production of information from the company and its directors, officers and employees.

Dividends
Under the Bangladesh Securities and Exchange Ordinance,1969 and the rules of the DSE and the CSE, when a final or interim dividend is approved by the directors of a Bangladeshi listed company, the DSE, the CSE and the Bangladesh SEC require that decision to be notified to them within 30 (thirty) minutes. The decision (as notified) will be subject to shareholders’ approval in the Annual General Meeting if the dividend is a final dividend. The dividends must be disbursed to the shareholders with 60 days of such declaration.

Issue of Shares
The Bangladesh Companies Act, 1994 also gives shareholders pre-emption rights, which may be disciplined by a resolution of the Directors. However, the Articles of Association of the Company provide that, subject to a Shareholders’ resolution to the contrary, any new shares to be issued must first be issued to the existing Shareholders pro rata to their holdings.

Issue of Redeemable Shares:
A Bangladeshi company may issue and redeem redeemable shares with shareholders’ approval in a meeting.

Reduction of Share Capital
A Bangladeshi company may by special resolution reduce its share capital in any manner subject to Court confirmation in a procedure analogous to that contained in the UK Companies Act, 1985.

Share Buy Back
A Bangladeshi company may buy back its own shares only by way of a court-approved reduction of capital.

Financial Assistance to Shareholders for Acquisition of Shares
Subject to certain very limited exceptions, the Company, being a public company, must not give financial assistance to any person for the purposes of the acquisition of any shares in the Company.

Determination Shareholders’ Interests in Shares
As in the UK, the register of members is definitive for determining the members of the Company.

Removal of Directors
The shareholders of a company may, by extraordinary resolution in a general meeting, remove any director and appoint a director to fill that vacancy.

Loans to Directors
The Company is not permitted to make any loans to directors or any person connected with a director, unless the loan is for less than 50 per cent. of the value of the shares in the Company held by the director; is approved by the Company in a general meeting; is approved by the directors; and is specifically referred to in the annual report and accounts of the Company.

Sale of Undertaking or Assets
There is no equivalent to the UK Companies Act 1985 provisions requiring the shareholders to sanction the acquisition or sale of a non-cash asset between a director and the Company.

Under the Bangladesh Companies Act 1994, the directors may not sell the undertaking of the Company without the consent of the shareholders in a general meeting.

Takeovers and Substantial Acquisitions
The Company is not subject to the City Code on Takeovers and Mergers as, being incorporated in Bangladesh, the Panel on Takeovers and Mergers does not regard the Company as being resident in the UK, the Channel Islands or the Isle of Man. As a result, a takeover of the Company would not be regulated by the UK Panel on Takeovers and Mergers. Under the Bangladesh Securities and Exchange Ordinance, 1969, companies listed on a Bangladeshi stock exchange are obliged to disclose to the Bangladesh SEC names and number of all holdings, amongst others, by any other person or entity of shares representing 10 per cent. or more of the issued share capital of the company. The Company will be obliged to make such a disclosure in relation to the Depositary upon Admission but the Company will not be obliged to disclose details of the holders of GDRs (being the beneficial holders of the New Ordinary Shares) even if any such GDR holder holds GDRs representing more than 10 per cent of the Ordinary Shares therein issue. The Depositary and the holders of GDRs will not be subject to any disclosure requirements in Bangladesh.

In addition, the rules of the DSE and CSE require changes in ”substantial shareholdings” to be disclosed to the DSE and/or the CSE, as applicable, by the Company. Whilst ”substantial shareholding” is not defined and there is no case law on the point, local market practice would suggest that shareholdings of 10 per cent. and above, and changes to such shareholdings, also need to be disclosed to the DSE and/or the CSE, by the Company.

Where a shareholder enters into a contract or a memorandum of understanding to acquire 10 per cent or more of the issued share capital of a Bangladeshi listed company from another Shareholder, he is obliged, under the Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Regulations, 2002, to make a public announcement, through a merchant banker, within three days of such contract or memorandum of understanding, specifying details of the acquiror including his percentage shareholding in the relevant company, the salient features of the contract or memorandum of understanding, and, if the acquiror wishes to make a wider offer to acquire shares, the number of shares that the acquiror would be prepared to buy from the public together with the terms of such proposed acquisition. The purchase price of such offer must be the higher of the price agreed under the contract or memorandum of understanding and the average trading price of the company’s shares during the previous 6 months. A shareholder is not obliged to make an offer to the public in the public announcement, but is obliged to make a public announcement (including a statement that he does not intend to make a public offer) upon each acquisition when such shareholder holds in excess of 10 per cent of the issued share capital of a Bangladeshi listed company. These regulations will not apply to the Depositary on the issue of the New Ordinary Shares.

If a shareholder does acquire over 90 per cent of the issued share capital of a Bangladeshi listed company, the shareholder shall make an offer for the shares remaining in public hands.

Bangladeshi law does not have an equivalent provision to the mandatory transfer provisions contained in section 429 of the UK Companies Act, 1985 which enable an offeror who has acquired 90 per cent. of the shares in a company to compulsorily acquire the outstanding minority. However, the Bangladesh Companies Act, 1994 does contain provisions for a court to sanction a scheme of arrangement (similar to the provisions in section 425 of the UK Companies Act 1985) and, subject to such court approval, for the mandatory transfer of shares pursuant to a scheme if the scheme is approved by not less than three quarters of the shareholders, within 120 days of the offer to acquire the entire issued share capital of a company.

Shareholders holding over 10 per cent. of the issued share capital of Bangladeshi listed companies are not permitted to enter into derivatives contracts referenced to their shares under which they short sell such shares.

Conclusion

The law pointed out that the minority shareholder’s reasonable expectations must be balanced against the need to permit the corporation’s directors the freedom to exercise their business judgment in managing the company. Absent exigent circumstances, a court will not ordinarily question the business judgment of those charged with running the company or the will of the majority, if it is properly exercised.

Thus, determinations of whether oppressive conduct has occurred are usually fact intensive and require a balancing of interests.

However, our courts have held that they have the authority to impose corporate buyouts and other remedies which are less extreme than dissolving the corporation. For example, one court held that merely awarding damages and granting an injunction on oppressive conduct would not adequately protect the aggrieved shareholders, given the majority shareholders’ conspiracy to deprive them of their rights and interests in the corporation. Thus, the court found that a buyout was the appropriate and necessary remedy in that case. So at the end we would say the a proper balance of the rights is necessary for a prosperous company.

Correspondence

For: The Lawyers & Jurists

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