Law Firms In Asia

A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company


Every company wants a smooth functioning. Earlier smooth functioning heavily depended on how the internal employees performed. It was essential that each and every individual performs to meet all the goals set by the company. Now a day, things have changed. Shareholders are now a very significant part of the company. Companies converting them into public limited and private limited have increased the level of investment greatly. Consequently, the rights of the shareholders have also created tensions among the companies.

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.

Stockholders are granted special privileges depending on the class of stock. 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.
  • The right to what assets remains after a liquidation.[1]

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.[2]

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.[3] [4]

Majority Shareholder

A majority shareholder (or group of shareholders) can cast the majority of votes at a general meeting of a company, and therefore controls all important aspects of running the company such as the appointment of directors, managerial decisions etc. This affects the rights of minority shareholders who are effectively deprived of their say in the running of the company.

A person or conglomerate who owns more than 50% of a corporation’s outstanding shares may be termed as majority shareholder.[5] This allows the majority shareholder outright control of the company’s operations, especially the election of its board of directors. Some majority shareholders are not involved in the daily operations of the company, but most are. Indeed, the majority shareholder is often the company’s founder.

In the context of Bangladesh, majority shareholders are normally in the Board of Directors and they are one who takes all the managerial decisions. By the order of the Central Bank (Bangladesh Bank) all the banks now a days keep a very insignificant amount of representation of the minority shareholders in the Board of Directors.

Minority Shareholder

Minority shareholders are shareholders who have minority stakes in a company that is controlled by a majority shareholder. 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.

The value of shares can be depressed by the existence of a majority shareholder (including a group of connected shareholders). 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 cannot (at least in any country with an effective legal system) blatantly cheat the minority, but there are more subtle ways in which the majority can favor itself, for example, by preferring to deal with group of companies (such as other subsidiaries of the parent).

In Bangladesh, minority shareholders are given less important and they are normally neglected in the Board meetings. Just to show the other minority shareholders that the board has one of their representatives along with the majority shareholders the companies do keep the representation.

Shareholders Right

A minority shareholder can give himself extra rights if things do not turn out as expected. Can a person who holds shares in a company but not in the majority have a meaningful say in the affairs of the company? The word “company” here is used in the context of the Companies Act 1965.[6]

These are entities which ordinarily, though not necessarily always, have the words “Sdn Bhd” or “Berhad” at the end of the name and are recognized as such.[7]

Decisions are made by voting and on the basis of a majority. The management of the company is in the hands of the directors who constitute the board and are invariably elected by a majority of the members present at a general meeting. Ordinarily, decisions at board meetings are also made with one director having one vote. The chairman will, if so provided, have a casting vote in the case of equality in the number of votes for or against a particular resolution.

On the other hand, decisions in general meetings would be made by the shareholders. Ordinarily this would be by a show of hands. However, any member has a right to demand a poll. This means that the vote will be considered, based on the number of shares held and not merely the hands put up in support or opposition.

A person, who does not hold a majority of shares and is therefore a minority shareholder, will not, on his own be able to influence any decision with regard to the appointment of directors or other decisions made at a general meeting.

Whether such a person was originally the majority shareholder but gave up his majority to accommodate new shareholders or whether he came in as a minority shareholder in an existing company really makes no difference. The fact of the matter is that it is the will of the majority that will prevail.[8]

The minority shareholder, even though he holds a substantial number of shares, cannot be assured on his own that he will be elected as a director. The majority may sometimes wish to recognize a minority shareholder by appointing him or his nominee as a director.

Protecting the Rights of the Minority Shareholders

Increasingly, companies are attracting skilled employees by offering stock options. While such stock offerings can attract and create incentives for key employees, they also create a class of minority shareholders — persons with ownership interests but little practical power to affect corporate governance. Ensuring fair treatment of this minority class can sometimes be difficult, especially in small, closely held corporations, where the shares are typically concentrated in the hands of a few owners who are often relatives or business associates.

To guard against oppressive behavior, most states’ laws give minority shareholders certain rights. While precise rules vary from state to state, several common law rights have emerged to protect all shareholders, including those in the minority, from oppression. Additionally, shareholder agreements or corporate bylaws often contain protections for minority shareholders.

Because a corporation is the common property of all of its shareholders, majority shareholders, who often control corporate management, owe a fiduciary duty to the minority to act in good faith and exercise sound managerial judgment. What constitutes a breach of this duty varies from state to state, but generally, the majority must not oppress the minority.

Oppression includes, but is not limited to, the misapplication of assets or the mismanagement of funds. Such behavior might range from negligent management practices that cause serious shareholder losses to illegalities such as granting “sweetheart” loans to shareholders or allowing them to use corporate funds to pay personal obligations. Further, conduct that might be harmless under one set of circumstances may be considered oppressive under another. For instance, payment of large salaries to officers might be considered reasonable during a period of high earnings, but oppressive when the officers are also majority shareholders and minority shareholders are frozen out of their share of the earnings by the large salaries.[9]

Additionally, during transactions that significantly affect the form of a corporation, such as mergers or acquisitions, majority shareholders owe the minority a duty of intrinsic fairness. Intrinsic fairness may be shown by ensuring that the majority treats the minority equitably in the transaction and the minority receives a fair price for its shares in case of a sale or merger. Any such transaction, moreover, must take place for valid business reasons independent of the majority’s personal interests, and majority shareholders must disclose fully to the minority all facts and circumstances surrounding the transaction.

Courts take accusations of oppression seriously and use their equitable jurisdiction to even the odds. The remedies available to courts include the appointment of receivers, invalidation of or injunction against the proposed action, payment of damages to shareholders or the corporate fisc, and in the most egregious cases, dissolution of the corporation.[10]

To protect the rights of all shareholders, including minorities, state corporations laws frequently include the following provisions:

* The right of all shareholders to inspect corporate books, papers and records. This right allows shareholders to protect themselves against mismanagement by or disloyalty of corporate managers or other shareholders. The right, of course, may be limited by the corporation to allow its exercise for proper purposes and at certain times and places.

* The right to bring derivative suits against corporate managers. These suits are appropriate when managers are breaching their fiduciary duties.

* The right of appraisal and payment in the event of a fundamental corporate change, such as a merger, which is opposed by some of the shareholders. Many states allow dissenting shareholders to demand appraisal and payment for their shares from the majority, if a shareholder vote is required for fundamental changes.

* Pre-emptive rights, which allow shareholders to maintain their relative equity in the company when new shares are issued. Pre-emptive rights act as a shareholder’s right of first refusal, allowing shareholders to purchase any new shares issued in their pro rata portion before those shares are offered to others. However, pre-emptive rights are usually subject to limitations.[11]

Laws governing shareholder rights vary from state to state. Corporations are well advised to keep informed of applicable laws and take appropriate steps to minimize the potential for minority shareholders claims.

Andrew Hallowell is a partner with Piliero, Mazza and Pargamen LLC, a Washington-based law firm. PMP offers a variety of services, including general, civil and appellate litigation in the federal and state courts, government departments and federal agencies. Its major practice areas include government contracts, administrative law, corporate, commercial, labor and employment, legislative services and real estate. The government contracts practice includes an emphasis on federal programs for small, small and disadvantaged and 8(a) firms.[12]

Establishing a Right

In order to give himself any such rights, such a minority shareholder must act at the time he decides to part with or give up his earlier majority shareholding or at the time that he chooses to become a minority shareholder.

This will depend on what the shareholder has in mind and what the other shareholders, who constitute the majority, are agreeable to. This will be with regard to his participation at board meetings, as well as general meetings. Apart from this, the others having or taking over control of the company may have created expectations regarding the level of success that is assured. Such rights can be obtained through entering into a contractual arrangement with the other shareholders. In this way, rights can be created which are not otherwise available on the basis of the Memorandum and Articles of Association.

Some may call such a document a “Shareholder’s Agreement”. Others may call it a “Sale and Purchase of Shares Agreement” or some other name. However, what is important is the specific content conferring such rights whose effect would be to supercede what is in the Articles of Association.[13]

In such a situation, the minority shareholders can seek a contractual provision that the other shareholders exercise their power to have him always elected as a director. It could further provide that he be a permanent director not subject to retirement by rotation like others.

A director may empower himself by a provision requiring his presence to constitute a quorum. But being present as a director alone will not enable such a person to affect the outcome of meetings. In the absence of specific provisions, such a director is likely to be out-voted. Thus, it will enable him to participate but not necessarily determine the outcome. Yet in other cases he may empower himself further by the inclusion of a provision that all resolutions to be passed would require an affirmative vote on his part.

Shareholder Rights

In practice, the strict rights and entitlements that come with the ownership of shares in a Limited Company are seldom fully exploited or utilized 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, and a Register of Director’s Interest in Shares, a Register of Charges and Minute Books. These must be kept open to inspection by shareholders.[14]

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.

Shareholders Disputes

If a dispute arises between shareholders, after considering the small print of the Company’s Articles of Association, probably the next most important legal principle for any shareholder to understand is Section 994 of the Companies Act 2006.[15] The most relevant part of the provision states as follows:- ‘A member of a company may apply to the court… for an order… on the ground that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of its members generally or of some part of its members…’ [emphasis added; a ‘member’ is simply a shareholder][16]

The section is, in itself, worded in a very legalistic manner and many lawyers find it difficult to understand, so what chance does the layman have?

What the section seeks to do is protect minority shareholders (those with a 50% shareholding or less) in circumstances where the majority shareholders seek to act in a way which is ‘unfairly prejudicial’ to their interests.

It would be impossible to accurately reduce to only a few words the many legal authorities on precisely what conduct is classed as ‘unfairly prejudicial’, but in very general terms it means that minority shareholders have a right to complain to the court if the majority shareholder(s) run the Company in a manner that damages their position and the worth of their shareholding, often done deliberately and often by misapplying or misusing Company assets. But the complaint cannot be vague or trivial (e.g. ‘they’re managing the business badly’) and must stand up to some objective analysis. Examples of ‘unfairly prejudicial’ conduct might be using company assets or money for the personal benefit of a shareholder or the majority shareholder(s) paying themselves far more than people in their position could objectively justify.

Court Orders Protecting Shareholders

Any complaint alleging a minority shareholder has been ‘unfairly prejudiced’ is a law suit brought against the other shareholders in their personal capacity. Where ‘unfair prejudice’ can be established, the Companies Act 2006 provides that the court ‘may make such order as it thinks fit’. Although this means the court has very wide powers to make almost any order, by far the most common order made by the court is an order that one or more of the shareholders should purchase the shareholding of the other shareholder(s)


Finally, there is the other aspect where either as a prelude to giving up majority control or assuming minority interest, the shareholder may have been given an assurance of minimum results that will be achieved by those now otherwise in control of the company.

Where there is a failure on this account, the shareholder may not want to remain a part of the company. His continued shareholding with or without a right to participate and veto decisions may in the circumstances be of little value. In such a case, there would be nothing better than to incorporate a buyout provision so that parties can go their separate ways.


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