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“A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company”– Explain & Illustrate.

Introduction

A shareholder means the person who holds shares of stock in a corporation. Also we can say the 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. According to Wikipedia, shareholder means, “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 corporation. Shareholders own the stock, but not the corporation itself. Majority and minority share holders are important for associating the company and the company’s functioning.”

Majority & Minority Shareholders

The majority shareholders and the minority shareholders are different and their rights are also different. Majority shareholders mean the ownerships, directors of the company or the owners of the company. And minor shareholders are one who buys the IPO as the primary share or stock exchange. Mainly the owners make the rule and the rights for the public IPO’s holders. This may differ from company to company. Stockholders are granted special privileges depending on the class of stock. There are some rights for the share holders. These rights are the variable from the country to country. For instance, the company of Bangladesh may not provide the same rights as the U.S Company has for their own company. But in general there are some rights for the shareholders which are almost universal and globally its being using. These rights may include:

  • The right to sell their shares provided there is a buyer.
  • 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.

According to the journal, “The Central Ohio Business Authority” [1], therefore, contrary to popular opinion, shareholders are NOT the (1) Owners of the corporation, (2) the claimants of the profit, or (3) investors, as in the contributors of capita. 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. According to Business First book, a journal written by David J Butler [2], “All majority shareholders should be aware of their responsibilities.”

Footnotes:

[1]. Retrieved from the journal, “The share Business Authority”, the business circumstance, vol 23, no 9, October 27, 2006

[2]. D. J Butler, http://www.cwslaw.com/CmsData/Site/ModuleNews/DJB%20scoop%20reprint%2010.27.06.pdf

Ownership of Stock

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. The two broad types of financing available to a corporation include equity financing and debt financing. Equity financing involves the issuance of stock, which investors purchase and which represent a share in the ownership of the corporation. The two basic types of stock are:

  • Common stock
  • Preferred stock.

Debt financing involves a loan of money from an investor to the corporation in exchange for dept securities such as a bond. Holders of debt securities generally do not enjoy the same rights as shareholders in terms of voting rights, participating rights, or other rights related to the ownership of stock.

Common Stock

The lowest level of stock in a corporation is common stock. The rights related to common stock depend largely on the articles of incorporation and by-laws of the corporation. In general, owners of common stock have voting rights in a corporation as well as rights to receive distributions of money from the corporation (dividends). In a successful corporation, common stock ownership can be very lucrative. However, if a corporation is unsuccessful, common stock owners are usually the last in line to receive a distribution of the corporation’s assets when the corporation’s assets are liquidated. State statutes often vary with respect to the default rights of common stock owners. The corporation may also issue multiple classes of common stock, such as nonvoting common stock or common stock with special dividend rights.

Preferred Stock

Unlike common stock, holders of preferred stock are entitled to fixed dividends and fixed rights to receive a percentage of a corporation’s assets are liquidated. With respect to the dividend rights, an example of such stock would include a name such as “$20 preferred,” which means the shareholder has a right to receive $20 in dividends per share before dividends are paid to common stock owners.

It is noteworthy that the board of directors in a corporation usually has the discretion to decide whether dividends are issued in a given year. If dividends are not distributed during one year, whether preferred stock owners receive dividends in a subsequent year depends on whether the preferred stock is cumulative or noncumulative. If the rights are cumulative, the corporation must be dividends during some subsequent year. If the rights are noncumulative, the rights to receive dividends are lost if the corporation does not issue dividends in a given year. Preferred stock owners generally do not have the same rights to vote as common stock owners. However, a corporation may grant voting rights and additional rights in its articles of incorporation or other provisions. State statutes also provide some rights to preferred stock owners by default.

Shareholder Rights, Actions and Liabilities

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 majorities of shareholders are in the secondary market and provide no capital directly to the corporation.

Shareholder Rights is a part of “Brabners Chaffe Street LLP”. According to this (“Brabners Chaffe Street LLP”) publisher and the law, the more shares mean more power. They are highly giving the power to the majority share holders as they are the real owner of the companies.

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.

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.

Every majority shareholders of a closely held corporation need to be aware of the duties he or she owes to minority shareholders Majority shareholders owe heightened fiduciary duty to minority shareholders that, if breached, will allow the minority shareholders to sue for actual damage and in extreme circumstance, punitive damages as well. Failing to recognize and respect their duties may cause the majority shareholder to be individually liable to oppressed minority shareholders.

Investors who purchase corporate stock enjoy a number of rights pertaining to their ownership. Unlike partnership law, where the owners of businesses are also the primary managers of the businesses, owners of a corporation generally do not run the company. Shareholders in a corporation are shielded from personal liability for the debts and obligations of the corporation. However, shareholders can lose their investments should the corporation fail.

Laws governing corporations in the United States are fairly standard from one state to the next. The commissioners on uniform state laws drafted the Uniform Business Corporations Act in 1928, though only three states adopted this act.

According to the Encyclopedia of Everyday Law [3], the American BAR ASSOCIATION in 1950 drafted the Model Business Corporation Act, which subsequently has been modified numerous times. The last major redrafting occurred in 1984. Thirty-one states have adopted all or a significant portion of the Model Act. Other states have modified their own state corporation statutes to contain sections similar to the Model Act. Delaware’s corporation statute is also significant, since most large, public corporations are incorporated in that state.

The rights of shareholders depend largely on provisions in a corporation’s charter and by-laws. These are the first documents which a shareholder should consult when determining his or her rights in a corporation. Shareholders also generally enjoy the following types of rights:

  • Voting rights on issues that affect the corporation as a whole
  • Rights related to the assets of the corporation
  • Rights related to the transfer of stock
  • Rights to receive dividends as declared by the board of directors of the corporation
  • Rights to inspect the records and books of the corporation
  • Rights to bring suit against the corporation for wrongful acts by the directors and officers of the corporation
  • Rights to share in the proceeds recovered when the corporation liquidates its assets

Footnotes:

[3] Encyclopedia of Everyday Law, American Bar Association, Section of Business Law 740 15th Street, NW

Washington, DC 20005-1019 USA Phone: (312) 988-5522 URL: http://www.abanet.org/buslaw/home.html

E-Mail: businesslaw@abanet.org

Since the majority of states or countries have adopted the Model Business Corporation Act, shareholder rights are generally consistent from one state to the next. Countries or states statutes should be consulted to determine whether an individual state has granted any specific rights to shareholders of businesses incorporated in that country or the specific state.

Bangladeshi Way of Regarding Rights of Shareholders

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.

Bangladesh Companies Act [4], 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. 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. They have two items in their general meetings. 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.

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 acquirer including his percentage shareholding in the relevant company, the salient features of the contract or memorandum of understanding, and, if the acquirer wishes to make a wider offer to acquire shares, the number of shares that the acquirer 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 percent 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.

The memorandum and articles of association are the constitutional documents of a Bangladeshi company. A company’s memorandum and articles of association (other than the objects clause) may be altered by a special resolution of the shareholders in general meeting. The objects clause can only be altered subject to confirmation from the Court.

Footnotes:

[4] Constitution of Beximco Pharma, Annual report 2010, retrieved on 03rd march, 2011 from http://www.beximco-pharma.com/investo-relations/share-information/rights-of-shareholders.html

Financial Disclosures


According to the Bangladesh Securities & Exchange Rules, “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.” — (Bangladesh Securities & Exchange Rules, Vol: 7)

These financial statements, in addition to the requirements of the Securities and Exchange Rules, 1987 and the Bangladesh Companies 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 it must be sent within one month of the particular half-year end.

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.

Shareholders’ Rights Key for the Smooth Functioning of the Company and Capital Market Development

Bangladesh’s capital market still remains one of the most underdeveloped markets in the region; the report observed underlining the need for streamlining rules and regulations that apply to listed companies.

According to the report from Hawker.com.bd, New Age Business [2009-09-06] [5], the corporate governance says, “The country needs to improve the standards of overall corporate governance to protect the rights of shareholders and bring more transparency in the capital market, said a report on corporate governance policy framework.

Good corporate governance is an important prerequisite for attracting capital required for sustained long-term economic growth in Bangladesh, according to the report ‘Corporate Governance Report on Standards and Codes’ prepared by three global and local agencies in cooperation with the Securities and Exchange Commission.

It highlighted recent improvements in corporate governance regulation, makes policy recommendations, and provides investors with a benchmark against which to measure corporate governance in Bangladesh.

Both the public and private sector in Bangladesh have taken steps to improve corporate governance in recent years, mentioned the report jointly prepared by the World Bank, Global Corporate Governance Forum of IFC, and Bangladesh Enterprise Institute.

‘While the SEC has been active in trying to protect investors, outdated laws, insider dominated boards, a shortage of qualified accountants and other professionals, and weak institutions all create problems for investors and hurt company performance.’ said David Robinett, private sector development specialist of the World Bank and lead author of the report.

The report suggested that the boards of both listed companies and state-owned enterprises needed greater independence and professionalism. ‘Current efforts to improve accounting and auditing should be accelerated, and the disclosure of corporate control be improved,’ it added.

The report recommended that the Registrar of Joint Stock Companies and the courts must be able to enforce the Companies Act.”

Footnotes:

[5]. News Source: Hawker.com.bd, New Age Business [2009-09-06] Retrieve on 6th March 2011, from http://www.hawker.com.bd/news_details.php?news_id=63758&news_category_id=14&val_lan=1

Conclusion

Investors who purchase corporate stock enjoy a number of rights pertaining to their ownership. Unlike partnership law, where the owners of businesses are also the primary managers of the businesses, owners of a corporation generally do not run the company. Shareholders in a corporation are shielded from personal liability for the debts and obligations of the corporation. However, shareholders can lose their investments should the corporation fail. 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. So at the end of the report and survey, I must say that the majority shareholders and the minority share holders must have a balance of their rights of their own share or property for a proper, right and suitable flow of a company.

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Bibliography

  • The Active Shareholder: Exercising Your Rights, Increasing Your Profits, and Minimizing Your Risks. Mahoney, William F., Wiley, 1993.
  • Corporate Governance. Monks, Robert A.G., and Nell Minow, Blackwell Publishers, 2001.
  • Corporations: Examples and Explanations, 3rd ed., Soloman, Lewis D., and Alan R. Palmiter, Aspen Law & Business, 1999.
  • Law of Corporations in a Nutshell. Hamilton, Robert W., West Group, 2000.
  • Model Business Corporation Act Annotated, 3rd ed., American Bar Association, 1998/1999.
  • Hawker.com.bd, BD News, New Age Business [2009-09-06] Retrieve on 6th March 2011.

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