INTRODUCTION
Business was once such where there was no need for a more than one person to own it and run it. But, gradually, with the increase in the scope of business there came the need to expand the business to earn more profits. Expanding the business could be possible with hiring more employees but the problem of finance remained. Moreover employees had to be paid. Many a times it is not possible for the owner to finance it all by himself. Thus arrived the concept of jointly owning a business so that the owners can finance the larger monitory need of the business. There are many forms of this combined ownership. The combined owners of these businesses are in general terms called shareholders as they have their shares of the business. Now, different owners of the same business can always have differences in opinions and the room for conflicts always remain. Moreover, all the owners might not have equal contributions on the business and thus conflicts might also arise between the majority and minority shareholders. So, in order to mitigate these conflicts and to run the business more smoothly and in a profitable manner, there are certain rules and regulations that are formed. In the present day business scenario, the rules and forms of owning these shares are very complicated and delicate. Even then conflicts prevail which hinder the smooth functioning. It is also logical that the majority will want more control than the minority. The right balance of rights and control between these shareholders is the key for a successful business.
BODY
Before we try to understand how a balance of rights and control between these shareholders can be done, we need to understand different concepts of the present day business scenario. Some definitions and discussions of these concepts are provided.
A company
A company is a form of business organization. It is a collection of individuals and physical assets with a common aim of maximizing the shareholder’s profits. It is also considered as a separate legal entity[1] and thus is treated as a “Legal Person”. So, the members or shareholders forming a company have limited liabilities as the legal entity or the company itself will be responsible for any kinds of defaults. A company can raise capital by issuing shares[2]. Persons or other organisations who buy the shares are partly the owners of the company.
The different forms of ownerships
There are different forms of ownerships by which an individual or a group of individuals can decide to form their company. Different forms are suited to different kinds and natures of business. We will mainly focus on the shareholder’s relationships in these different forms.
Sole traders
In this form of ownership, there is only one owner who invests in the business all by himself and also has full control over the business and also receives all the profits that is earned. This is the simplest form of ownership.
Partnerships
In this form there can be more than one person who will invest in the company. So the multiple owners will be called partners. It is not mandatory that every owner will have to invest an equal amount in the business. Generally the number of partners is limited to less than twenty.
Close Corporations
This is a form of business where the numbers of members are generally from one to ten. A close corporation is generally formed in a family business and taking members of the family. This form is really important in our discussion as we will largely deal with this kind of ownerships. The members or the shareholders generally control the business by themselves.
Private Company
In this form of ownership the members can go up to fifty. The profit earned by the company is shared by all the members. Generally, the control lies with a director who is elected by the voting of the shareholders. Forming this is lengthy and critical.
Public Company
This is the most complex form of business and also has the potential to get a large amount of financing. The number of owners starts from seven and can go up to relatively unlimited numbers. Here financing is availed from the public by selling shares to them and so there can be a huge number of shareholders. Profits are divided amongst the shareholders on the basis of types and numbers of shares owned.
SHAREHOLDERS
A shareholder, also called a stockholder, is an individual or an institution that owns the shares or stocks of a company but does not own the company all by them. Shareholders are actually the subsets of stakeholders[3].
Preferred Vs Common Shareholders
A shareholder can be a preferred or a common one. A preferred shareholder has less risk in the business as he will receive the same amount of dividends[4] no matter what. Moreover, in case of liquidation[5] of the company, they will be satisfied prior to the common shareholders. However, the increased risk of the common shareholders is offset by the chance of having additional dividends.
Majority Vs Minority shareholders
In general sense Majority shareholders are those who own more than 50% of a company’s shares and minorities are those who own less than 50%. In real business practice, then those who have more control over the decision making of the company and in electing directors, are called majority shareholders. The majority shareholders have to perform fiduciary duties towards the minority shareholders. The fiduciary duty[6] is one of trust and legality that binds two or more parties together in managing money or some other assets. In such a relationship one party has more power than the other and can exercise more control over a common thing that benefits both the party. The party possessing more control over the other can not, however, act in way that benefits them at the expense of the other party. They can not also unduly influence the minority party.
RIGHTS OF SHAREHOLDERS
The Companies Act[7] provides various rights and rules of a company. Some important rights are provided below in light of the companies act.
- The right to vote in the general meetings of a company. Usually, they can not nominate directors but can vote for the nominated directors.
- The right to view and inspect the annual financial reports[8]. A shareholder should be given a copy of the balance sheet and the “statutory report[9]“
- The right to inspect the minutes of the proceedings of any general meeting, provided that he is without any charge.
- The complete right for applying for the correction of the register, if his/her name is omitted from the register of members.
- The right to transfer his/her share, complying with the rules if any.
- The right to apply for the winding up of the company.
- After winding up, surplus assets if available should be distributed among shareholders.
- The right of receiving dividends first by the preferred shareholders.
- The right to apply to the Central Government for relief and redress, under some cases.
- An extra ordinary general meeting can be cancelled by shareholders jointly.
- The right to claim damage and avoid contract in case of any deliberate concealment in the prospectus.
- Various other rights and privileges to the shareholders may be given by The Articles of[10] Association.
RIGHTS OF MINORITY SHAREHOLDERS
Typical rights of minority shareholders are:
• The right to vote on the election of directors.
• The right to amend corporate bylaws.
• The right to amend articles of incorporation.
• The right to vote on major corporate events such as mergers, liquidation, or the sale of substantially all the corporation’s assets.
• The right to take action through a written consent.
• The right to annual stockholder meetings.
• The right to call special stockholder meetings.
• The right to inspect books and records and the list of shareholders.(source- www.shajlaw.com/media/reports/TreatmentofMinorityShareholders.pdf)
As a matter of fact though, the minority shareholders are mostly unable to use their rights. As the majority owns the corporation, they control it. This has been a point of focus for many it is being tried to protect minority rights. If it is not done, then people will not be attracted to own minority shares. Minority shareholders have long being oppressed and there are many instances of that. Three cases of such conflicts are provided and this shows why a right balance is important.
LAWRENCE VS THEODORE
This is a brotherly dispute between two brothers named Lawrence and Theodore Lerner. The two brothers owned the corporation and since 1965 they have been the only shareholders of the corporation. Theodore, the elder brother of the two owned about 73 % of the shares while the younger sibling Lawrence, owned about 26 %. Theodore was the Corporation’s president and Lawrence was the secretary and a director. Lawrence was in that role until 1983.
In 1985, as a result of some ongoing acrimony between the brothers, the minority shareholder Lawrence sued Theodore. Lawrence alleged that there has been a vital breach of the fiduciary duty. As a result of this, Theodore also retaliated by trying to freeze out[11] Lawrence by a process called reverse stock split[12] where the corporation would buy the shares of Lawrence at a fair price. This further degraded the already bitter relationship and Lawrence suing him again. The court finally provided Lawrence an interlocutory injunction[13] forbidding the Corporation from carrying out the reverse stock split. It is also called interlocutory only and is an instant and temporary relief or solution until the final original hearing of any case which might require time to commence.
With the interlocutory injunction, there was a temporary settlement between the parties in 1987. In this settlement, the court settled that Theodore could continue with his operations and could use the employees of the corporation for the profitability of it. Lawrence would continue to remain a shareholder of the corporation. Moreover, Lerner Corp. was not allowed to issue any additional shares of common stock without at first offering Lawrence the right to purchase his proportionate ?share. But, unfortunately this did not last for long.
In the year 1991 Lawrence sued Theodore for yet another time which is known as the “the enforcement suit”. This time only, a huge sum of money was paid to Lawrence. The corporation then had to borrow money to make a proportionate payment to Theodore. Consequently, a stock sale was initiated to liquidate this indebtedness in 1995.
ALEX VS JOHN
This is another example of conflict between the majority and minority shareholders in the case of KIRIAKIDES v. ATLAS FOOD SYSTEMS SERVICES INC. The minority shareholders complain that the majority shareholders have acted in ways that are fraudulent, oppressive and unfairly prejudicial. As a result they seek to buyout their shares under the dissolution statutes[14].
This is also a conflict among the family members as the members are the shareholders. Here, the respondents[15] are John Kiriakides and his 74-year-old sister Louise Kiriakides. They are the minority shareholders in their family business, The Atlas Food Systems & Services, Inc. (Atlas). The Petitioners[16] are their older brother, Alex Kiriakides, Jr.,? and the family business and its subsidiaries, Marica Enterprises, Ltd. (MEL). Atlas food system is a food vending company that supplies refreshments to industries and other businesses. Atlas began its journey before the second World War. Alex and John helped their father in building up the business. The business was booming in the beginning but later slowed down when Alex was away during the war. Their father died later in 1949. In 1956, Atlas was incorporated. Alex is currently the majority shareholder with 57.68%. John owns 37.7% and Louise owns 3%.Alex is also the chairman of the board of directors and has the most control over the organisation. In 1986, John became President of Atlas, after years of operating in other posts.
Atlas, for many years was operated as a close corporation by the family members and also thrived a lot. But problems began when distrust began between the brothers over a transfer of property. Alex convinced his brother to transfer a commonly owned property. Alex told him that it was a partial transfer but later on john found that the whole interest was transferred. Later on, due to the mistrust, John started to ask for documents and records concerning the family business. Alex did not end here. He also decided to convert the business to another form without even consulting John and also decided o sale a piece of commercial land. One fine morning, when John went to work as usual in the company, he was informed that Alex has decided that John will not serve as the president anymore. Furthermore, in1996, Atlas offered to purchase John’s interest for one million dollars. John rejected the offer flatly and decided to go for legal actions.
After a prolonged hearing of five days it was decided by the court that Alex was guilty of not conferring to his fiduciary duties and also duties that were fraudulent, oppressive and prejudicial towards the minority shareholders. It was decided that they suffered damages for this fraud and the judgement was in favour of john.
MR. MUSA ZAKARIA VS MRS. MAYA ZAKARIA
Collectively with his brother Mr. Musa, Mr Zakir began a factory which manufactured ships by the name “ZAKARIA SHIP MANUFACTURING COMPANY.” From the starting, the majority shareholder & the president of the company was Mr. Zakir owning 70 % of the shares. Mr Musa was the minority shareholder owning 30% of the stock. Mr. Zakir being the majority shareholder always ensured that Mr. Musa never suffered any oppression and always gave him the opportunity to voice his opinions in the important decisions. However, after running the company for 25 years efficiently, Mr. Zakir fell ill. Surprisingly he transferred all his shares to his wife Mrs. Maya and she was made the president.
Mrs. Maya however, didn’t bother to take measures that her husband had never taken and contrary to him, she tried to reap all the benefits at the expense of Mr. Musa’s rights. Without even consulting Mr. Musa, she formed agreements with different suppliers and took all the advantages from those dealings. She declared dividends unlawfully. All these things made Mr. Musa furious. Maya even tried to freeze out Mr. Musa. These conflicts were hugely affecting the performance of the company & Musa decided to take legal actions against Maya.
Meanwhile, Mr. Zakir came to know about Musa’s decision to take legal action and so he called a meeting in presence of a lawyer with his brother and wife. Maya was explained the horrendous outcomes of her exploitation of fiduciary relationship. Mr. Zakir, by the aid of his lawyer, decided that from then on a healthy balance between the rights of the majority and minority should be maintained. Consequently, the goodwill of the company was conserved and the price of the shares was fairly high. Their annual financial reports portrayed a remarkable augmentation in the company profits.
ANALYSIS
From the examples of the above cases, it is very evident how important it is to maintain the right balance between the majority and minority. If the right balance is not maintained and if it drastically dissatisfies the minority, then a conflict between the two parties might lead to a tarnished image of the company. In that case smooth functioning becomes very difficult. No one wants to get associated with a company which has litigations[17] and share prices go down. We have also seen in the Zakaria example what a balanced rights can do. We learned how a business can flourish through smooth functioning when shareholders have got balanced rights.
Dispute resolution to strike the right balance
Majority and minority shareholder disputes are more evident in private and close companies. Continuing illegal activities in such companies affect more the minorities than the majority. In such companies if there is no right balance, then the majority can run the company as if it were only owned by them and they can reap their own benefits at the expense of the minority. This is why more protection is given to the minority. They also face illiquidity as they are in such companies where sale of shares is restricted. These oppressions can be eliminated by minority litigations or before that. Minority shareholder oppression can also be reduced by certificate of incorporation and bylaw amendments, along with shareholder agreements. A judge can take measures such as
1) Payment of money
2) Ordering the majority to buy back the minority shareholder’s shares for a reasonable price if the minority is willing.
3) Restoring the oppressed shareholder to his or her former business position.
4) Holding an auction at which all of the shareholders have the right to purchase shares of the corporation.
The Court can also authorize the commencement of a derivative action. It can also grant interlocutory to ensure that majority do not take the chance of the long time needed to start hearing of an alleged oppression.
Conclusion
The phrase “might is right” might be true in some cases but certainly not in the case majority and minority shareholders in a company. The majority can be mighty but there are rules via which a proper balance should be maintained. This is especially true in cases of companies where entire shares are held by the members same family. Through the above discussions it is evident that the interests of the shareholders are more protected in case of listed public companies compared to private and closely held companies. But, no matter how mighty the majority are, they can not smoothly run the company without the active support of the minority. Even after going through all these rules of minority protections through litigations and courts above, ultimately it has to be agreed upon that dragging the matter to the court should be the last possible option. Settling the issues without going for legal actions, if possible, is the best possible solution.
[1] This means that the business has some of the same laws which are imposed on a person.
[2] A joint stock company divides its capital into units of equal denomination. Each unit is called a share
[3] Whoever is connected directly or indirectly to the company
[4] Payments of a company to its shareholders. The amount is decided by the directors and it can vary.
[5] The process by which a company is brought to an end and the assets redistributed.
[6] The duty of someone who is superior and influential towards another partner who is not.
[7]Companies Act is a stock short title used for legislation in the United Kingdom relating to company law.
[8] Reports that firms have to publish annually to revealing their financial positions.
[9] Reports that needed to be brought out as per law.
[10] Requirements for the formation of a company.
[11] Freezing out a shareholder is ousting him from the company by buying out all his shares.
[12] The process by which a company issues smaller number of new shares to a original shareholder in proportion to there original shares owned by him which are then cancelled.
[13] It is also called interlocutory only and is an instant and temporary relief or solution until the final original hearing of any case which might require time to commence.
[14] A formal written enactment o dissolve a company in this case.
[15] People against whom complains are lodged.
[16] A person who pleads with government institutions for a rightful judgement against any oppression done towards him.
[17] The process of making and defending a claim in a court of law.
Correspondence
For: The Lawyers & Jurists
M.L.Hotel Tower Ltd,208,Shahid Syed Nazrul Islam Sarani,
Bijoy Nagar, Dhaka-1000.
Email-admin@lawyersnjurists.com/nomaer@hotmail.com
www.lawyersnjurists.com
Country code+ Ph No.
Ph:0088-02-9571389; 0088-02-9513408,
0088-02-9564329, 0088-02-9564398
Direct cell with country code:
Local Code :
a)0088-01733689444
b)0088-01674647033
C)0088-01552632768