“A proper balance of the rights of majority shareholders and minority shareholders is essential for the smooth functioning of the company”. Explain and illustrate.
In corporate business, shareholders are the source of finance, by which every company run their business. Shareholders are often said to be the owners of a company. Now a day, large businesses are incorporated in stock market. The advantage of the corporation is mainly limited liability, easy way to arrange funds for business, and the contributions of common people in the business. If a firm is a limited liability company, incorporated in stock market, can get advantages like tax reduction, smoothness of business etc. The shareholders enjoy the profit of the company and they are liable for the company. But there is a problem among the shareholders, that the majority shareholders enjoy the maximum right and minority shareholders are often deprived from their rights. What are the imbalances of rights between majority shareholders and minority shareholders, and, is it good for a company or not; to know this, I have conducted this research and know the circumstances. After this, I have been able to give some proposals for the balance of the rights of majority shareholders and minority share holders.
2. Key Terms
To conduct this research, I had to understand some key terms, which has helped me to understand the concept needed for this research. Therefore, I am giving a short conceptual description of those words:
Company: The term ‘Company’ is used to describe an association of a number of persons, formed for some common purpose and registered according to the law according to companies.1
1. This definition is taken from the slide of LAW 200 (AMU).
Lord Justice Lindley defines: “By a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.”2
According to Geoffrey Morse, “A registered company, i.e. a company incorporated by registration under the company Acts, is regarded by the law as a person, just like a human being. This artificial or juristic person can own land and other properties, enter into contracts, sue and be sued, have a bank account in its own name, owe money to others and be a creditor of other people and other companies, and employ people to work for it.”3
According to the above definitions we can understand that, a company must be registered, it can act as a person, it is treated as a person. Usually, people form companies, because which goal can not be achieved by an individuals, those goals can be easily achieved by a company.
Share: A share is generally the portion of equity, or the claim on asset of a shareholder. According to A.K. Sen, “A share may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profits, if any, and of and of a proportionate part of the assets of the company upon liquidation.”4
Shareholders: Shareholders are the proprietor of the company, who has the ownership, who enjoys the profit from the company, and who is liable for the company.
2. This definition is taken from the slide of LAW 200 (AMU).
3. Charlesworth’s Company Law , By Geoffrey Morse, 13th Edition, 1987, Published by ELBS (English Language Book Society)
4. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 613)
Majority Shareholders: The shareholders obtain major portions of shares are called majority shareholders. According to Investopedia, “A person or conglomerate who owns more than 50% of a corporation’s outstanding shares.”5
Generally, majority shareholders are the founders of a company, or other words, the founders of the company hold the major portion (more than 50%) of a company to control the company. Investopedia explains majority share holder, “Owning that much of a corporation gives an entity a huge amount of control. The majority shareholder is often the founder of the corporation.”6
For example, more than 50% shares ‘Grameen Phone’ are holding by Grameen Phone, a company of Bangladesh, and Telenor Corporation, a Norwegian telecom partner of Grameen Phone.
Minority Shareholders: The shareholders, who own the minor portion of shares of a company, are the minority shareholders. According to businessdictionary.com, “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.”7Generally the other companies, agents, and common people are the minority shareholders. They get the shares from stock market, by buying the shares.
For example, any one can be the shareholder of Grameen Phone by buying their shares. In this case, the person will be a minority shareholder of Grameen Phone. After the incorporation of Grameen Phone in the Dhaka Stock Exchange (DSE), many common people are the minority shareholders of Grameen Phone now.
5. www.investopedia.com defines the term, majority shareholders, in their online investment dictionary.
6. www.investopedia.com explains the term, majority shareholders, in their online investment dictionary.
7. www.businessdictionary.com defines the term, minority shareholders, in their online business dictionary.
3. Classification of the rights of the Shareholders
Share holders enjoy various rights. There are different sources of rights. According to A. K. Sen, the rights of shareholders can be classified in the following manner: (1) Rights given by the Companies Act, (2) Rights given by the ordinary law of the country, for example, legal rights, property rights and remedial rights. (3) Contractual rights, for example, rights given by the Memorandum and Articles of Association.8
4. Rights of the shareholders
The Company Act gives various rights to the shareholders of a company. Bangladesh has also a Company Act named, ‘Company Act 1994’. According to the book of A. K. Sen, the important rights are given below:
(1) A shareholder can attend and vote in the general meetings of a company. He is entitled to receive notice of all such meetings.9
(2) The holder of a Share Warrant does not ordinary posses the right to vote, but the article of a company may give him the right.10
8. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 618)
9. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
10. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
(3) A shareholder has certain rights in respect of accounts. A shareholder must be given a copy of the balance sheet and the “statutory report” in the case of the “statutory meeting”.11
(4) A shareholder is entitled to inspect the minutes of the proceedings of any general meeting without any charge.12
(5) A shareholder has the right to inspect the register and index of members and debenture holders and the annual returns without any charge. He can also take extracts from any of them.13
(6) If the name of any member is, without sufficient cause, omitted from the register of members, he can apply to the court for rectification of the register.14
(7) A shareholder can transfer his share, subject to any restrictions that may be contained in the articles.15
(8) A shareholder can apply for the winding up of the company under certain circumstances, for example, if default is made in holding the statutory meeting and delivering the statutory report or if the number of members of the company is reduced to below seven (in the case of public companies) and below two (in the case of private company).16
11. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
12. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
13. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
14. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
15. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
16. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
(9) If surplus assets are available after winding up, they are to be distributed among the shareholders.17
(10) Preference shareholders are entitled to get dividends.18
(11) Shareholders have the right to apply to the Central Government for relief and redress under certain circumstances, for example, if the annual general meeting is not held; if there is mismanagement and oppression by the minority etc.19
(12) A shareholder, jointly with certain other members, can call an Extraordinary General Meeting on Requisition.20
(13) A shareholder can avoid the contract of share and can claim damage, if there is any misstatement or deliberate secrecy of a material fact in the propspectus.21
(14) The articles of Association of a company may give various other rights and privileges to the shareholders.22
17. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
18. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
19. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 617)
20. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 618)
21. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 618)
22. Business Law, By A. K. Sen, 26th Edition, 2006, Published by World Press Pvt. Ltd. (page- 618)
5. 3 Basic Rights of Minority Shareholders
Minority shareholders do not have the all rights mentioned above. But they have some basic rights. Those basic rights give them some right to the company. The CEO Encik of Minority Shareholder Watchdog Group (MSWG), Abdul Wahab Jaafar Sidek gives an expert presentation at Asia Network on corporate Governance of State-Owned enterprises, in New Delhi, India in June, 2008. We can know these basic rights from this presentation. According to the presentation, the three basic rights of minority shareholders are:
1) The right to seek information23
a) Right to know about the price sensitive information of the company, fair to all
Shareholders irrespective of each individual’s shareholdings.
b) Right to inspect the Register of Members, Directors, Charges, Debenture Holders, etc and
get copy thereof.
c) Right to receive Notice of General Meetings (the AGM or the EGM).
d) Rights to receive annual report and audited accounts.
e) Right to receive quarterly and annual accounts.
f) Right to inspect the Minutes of General Meetings.
g) Right to be kept fully informed of what is happening in the company.
2) The right to voice opinion24
a) Right to attend general meetings.
b) Right to requisition for a general meeting.
c) Right to get the court to direct the company to call a general meeting.
d) Right to appoint proxies to attend and vote at a general meeting.
e) Right to be heard and make proposals at shareholders’ meeting.
f) Right to vote and elect directors and fix their remuneration.
g) Right to nominate director.
h) Right to appoint auditors and fix their remuneration.
i) Right to receive dividends, if declared.
23.These information have been gathered from www.mswg.org.my
3) The right to seek redress25
If the company’s affairs are being conducted in a manner deemed to be oppressive to, or in total disregard of the interests of the minority shareholders, and/or where the directors having exercised their powers in a manner deemed to be oppressive to, or total disregard to the interests of the minority shareholders.Other circumstances include certain act of the company which has threatened, unfairly discriminated against or prejudicial to the interests of the minority shareholders; or where certain resolution of the members (or any class of them) has been done or has threatened or prejudicial or unfairly discriminated against the interests of the minority shareholders.
6. Deprivation of Minority Shareholders
The minority shareholders face many problems. Attorney and Counselor at Law, Saboor H. Abduljaami, describes the problems those are faced by the minority shareholders :
1) Minority Shareholder Oppression26
Minority shareholders may find that their investment is illiquid and their shareholder rights are being exploited. This usually happens when minority shareholders fail to protect themselves. Certificate of incorporation and bylaw amendments, along with shareholder agreements, go a long way towards preserving the value of a minority investment and reducing minority shareholder oppression.
In extreme cases of illiquidity and exploitation, the minority shareholder may request that a court involuntarily dissolve the corporation. Involuntary dissolution is a statutory remedy that the court may impose if a minority shareholder can prove “oppression.”
24. These information have been gathered from www.mswg.org.my
25. These information have been gathered from www.mswg.org.my
26. These information have been gathered from www.shajlaw.com
Minority shareholder oppression refers to “conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise…A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations…” In re Kemp & Beatley, Inc., 473 N.E.2d 1173 (N.Y. 1984)
Historically, courts have been reluctant to order involuntary dissolution and have made it tough to prove oppression. Recognizing that, some state incorporation now provide for intermediate relief such as the appointment of a custodian or provisional director.
2) Corporate Board Members Shareholder Harassment27
An outgrowth of minority shareholder oppression, corporate board members’ shareholder harassment may also negatively impact the liquidity of a minority stake. The best way to deal with this issue is at the outset, through the corporation’s certificate of incorporation and bylaws, and possibly through a shareholder agreement. After the fact remedies include seeking the help of the courts and initiating a shareholder lawsuit on the basis of minority shareholder oppression.
3) Minority Shareholder Litigation28
A minority shareholder may turn to litigation to alleviate the burden of exploitation and investment illiquidity. Minority shareholder litigation typically focuses either on the majority shareholder’s breach of a fiduciary duty or minority shareholder oppression.
27. These information have been gathered from www.shajlaw.com
28. These information have been gathered from www.shajlaw.com
Whether a minority shareholder lawsuit focuses on fiduciary duty or oppression, proving exploitation is a necessity. Exploitation generally takes the form of salaries, bonuses, “perks,” and fringe benefits going to the benefit of majority shareholders while the minority shareholder gets less or none.
7. Why Balance of the Rights Are Important?
Balance in the rights of majority shareholders and minority shareholders need a balance for the smooth functioning of the company because:
1) Minority shareholders contribute a certain potion of the fund of a company. If they does not get their rights properly, they can stop further investing, which is not good for company.
2) Minority shareholders can take certain legal actions if they do not get their rights properly, it will not be good for the majority shareholders.
3) If the rights of minority shareholders are defaulted, the company looses it’s goodwill.
4) The competitors get advantages, if the minority shareholders do not get their rights.
8. Minority shareholders in Bangladesh
In Bangladesh, minority shareholders are generally common people. They also face the deprivations which are mentioned above. Most of them do not know about their rights. They do not have even the proper guidelines from the company. Most of them do not know the financial methods, by which the DSE or CSE run their activities. These minority shareholders do not have the necessary education, which is needed to invest in stock market. As a result, they are often deprived of dividends. Most of them unknowingly do Market timing, and try to get more return in less time. As a result, they often looses their invested money by acting unwise transactions. In January, 2011, DSE faced a recession in rates, and these minority shareholders react badly, damaged vehicles and properties. If they know and get there proper rights, they can estimate inner strategies, act wisely, and get benefits.
9. Some Suggestions
Throughout this research, I have made some suggestions, which will ensure the companies to serve the rights of the minority shareholders:
1) Companies should publish regular updated annual reports which will be available for the minority shareholders.
2) Minority shareholders should be informed possible dates of general meetings.
3) Minority shareholders should be informed that what decisions has been taken in the general meeting.
4) Minority shareholders, with terms, should be given the right to vote.
Besides, the government should take care of the rights of the minority shareholders.
Minority shareholders are the backups of a company. They should get they proper right, which is balanced with the rights of majority shareholders. If there is a balance of rights, a company will function smoothly due to proper investment.
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