“A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company”
Introduction: Going into business with others is the commercial equivalent of getting married; and the divorces which often follow can be just as painful as a marriage breakdown.
So it is essential to treat any business venture just as seriously as getting married. There may be no such thing as a legally binding pre-nuptial agreement in English law, however, in business, there are steps you can take to best protect your position. Similarly, if business relationships break down, failing to get good advice at an early stage could cost you dearly(1).
Shareholder Rights aims to outline the legal position of shareholders in a Private Limited Company, the pitfalls, the precautions that can be taken and what can be done if it all goes sour(1).
The following sets out a brief summary of the salient provisions of Bangladeshi company law and regulation relating to rights of shareholders of the Company. It is not, and is not intended to be, an exhaustive or definitive lists of such rights but is intended merely to provide brief details and information relating to such rights.
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(2).
Proper Balance of the Rights of Majority and Minority Shareholders: The basic principle relating to the administration of the affair of a company is that ‘the will of the majority prevails or majority is supreme’. The general rule is that the decisions of the majority shareholders in a company bind the minority. The right of the majority to have their way has, however, been occasionally abused and the whip of majority has often produced sullen effects prejudicial to the best interests of the company and the majority shareholders. In such a case a proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company. The oppression of minority or mismanagement of a company by majority therefore calls for some remedial action. The companies act. 1956 has laid down certain provisions which restrict the unbridled supremacy of the majority and confer rights on minority to apply to the National Company Law Tribunal or to the Central Government in case to the oppression or mismanagement(3).
The word oppression has not been defined in Companies Act. ‘When the ownership rights of a member are violated or he is not given a fair play toward his rights it is called oppression. In other words, a visible departure from the standards of fair dealing, and a violation of the conditions of fair play’ is termed as oppression. The sum and substance of the matter is that ‘oppression’ or ‘oppressive conduct’ means not keeping to the accepted standards of honesty and fairness and a lack of regard of other shareholders’ interest(4).
In practice, the strict rights and entitlements that come with the ownership of shares in a Limited Company are seldom fully exploited or utilised by shareholders. This is largely because shareholders are generally unaware of the rights that they have simply by virtue of being a shareholder. Similarly, most Company Directors would be alarmed at the strict obligations that they have as regards the Company’s shareholders, which include maintaining a Register of Directors/Secretaries, a Register of Shareholders, a Register of Director’s Interest in Shares, a Register of Charges and Minute Books. These must be kept open to inspection by shareholders(5).
It may seem an obvious statement but the greater the shareholding of an individual, the greater are his/her rights and the greater is his/her power within the Company. This is so not only because the larger the shareholding the more likely it is to represent a controlling interest, but also because the Companies Act affords greater rights and power to an individual as the size of his/her shareholding increases. For example, a shareholder owning 5% of a company has the right to have an item placed on the Agenda for discussion at a General Meeting and, once the shareholder’s ownership reaches 10% of the company, he/she has greater rights including the right to force a formal audit of the annual accounts.
In the great majority of Limited Companies, a shareholding in excess of 50% of the issued share capital will be enough to control the company, dictate the makeup of the Board of Directors and to be able to do most of the acts necessary to run the company in its everyday business(6).
It is possible for those owning less than 50% of a company to protect themselves from being at the mercy of those holding over 50% of the shares in the company and this is one reason why shareholders should give serious consideration to agreeing a shareholders agreement or adopting professionally drafted Articles of Association.
Until now, shareholders rarely had any input into the slates of candidates put forward for board positions, but henceforth, the companies will have to include applicable shareholder nominees in the company proxy materials they send to all shareholders. This means that investors could eventually have greater influence over companies’ strategic and financial direction. However, while investors will be able to aggregate their holdings to meet the 3% threshold, they won’t be able to use the new rule to seek a change of control at a company or nominate more than 25% of a company’s board of directors(7).
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(8).
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(9).
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.
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(10).
Issue of Shares
The Bangladesh Companies Act, 1994 also gives shareholders pre-emption rights, which may be disapplied 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(11).
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(12).
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: In the conclusion we can easily that in a company there should be proper balance of majority and minority shareholders for smooth functioning of the company. Minority shareholders cannot take any decision of the company but they have some rights within the company. Majority shareholders sits for AGM and takes decisions. But for smooth functioning of the company there has to be a proper balance among the shareholders.
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