A proper balance of the rights of Majority shareholders and Minority shareholders is essential for the smooth functioning of the company
Introduction
In today’s world a major concern and becoming more of a regulatory dilemma within a corporation is that of balancing rights of minority shareholders against the principle shareholders. Well every shareholders of a company is more or less concern about the fact whether the democracy of everyone is provided or not. The term shareholder democracy represents an unwise correlation between corporate authority and political authority. Unlike political authority or political governance, corporate governance is most likely a contractual relationship in nature. And corporate governance is the base which will enforce the strength of contractual relationship.[1]
The most important thing where every company should put their attention is the relation between the company and the shareholders and also the relationship between the shareholders within the company which are basically contractual[2]. The memorandum and articles of institute comprise the central part of contract and company law provides the outline by which the contract operates. The fundamental meaning of this contract is that every shareholder is allowed to share the profits and possessions of the company in proportion to shareholding. That means every shareholder altogether put their effort for the growth of the company. So the fact is obvious that the management and board of the company have the liability towards each and every shareholder not only for the majority or principle shareholder.
The democracy within shareholders is not the core of commercial shape of company at all. Company shares provide first and primary ownership privileges for the profits and assets. Sometimes shares doesn’t have voting rights, sometimes it also carry the rights to control and appoint management of the company and also grant certain major decisions[3]. For the proper balance of the rights of the shareholders company authority should be concerned. Whenever a shareholder’s ownership rights get it prioritized attention, there is no doubt that his rights have been fully appreciated.
Shareholders and Their Rights
In real world, Rights and power which come with the possession of shares in a limited company[4] are rarely fully exploited by shareholders. That happens mostly because; shareholders are usually unconscious about the rights what they have basically by virtue of being an investor. Likewise, most company Directors would be anxious at the strict obligations that they have towards the company shareholders, which consist of maintaining a list of Directors, a Register of Shareholders, and a record of Directors concern in Shares. And the important part is that, these things should be keep open for inspection by the shareholders.
It is an obvious statement that the superior shareholding of a person, the enhanced his/her rights and also he/she has more power within the company. That is not because of his/her interest of controlling the company but it’s also because the company act support this statement and the company will provide higher amount of power to an individual shareholder as his/her share percentage increases. As an example, a shareholder poses 25% of a company share holds the right to placed an argument for the board meeting. When the shareholders possession reaches 30%, he/she will gain more powerful rights like forcing an official review of annual financial statements.
The opposite side of majority shareholders are the minority shareholders. They also do have the ownership of the company like the majority but their power works within very little range. May be an individual own 1% of an company but in case of taking any important decision company will listen to that majority shareholder who owns 25% of the company. The minority shareholders may have some other rights like voting in annual general meeting, or access to all company information but these doesn’t carry a greater amount of value.
Conflict between Shareholders Rights
The stress within majority and minority shareholders is particularly remarkable because lawmakers must come up with an attractive solution[5] to maintain these two alternative powers. Firstly, compromise the majority shareholder untrammeled diplomacy may cause the misuse of authority which will dishearten the value of a firm. Majority shareholders are benefited by several strategies on behalf of fleecing minority shareholders, but among all the most powerful tool is using the shareholding advantage and cut out all other shareholders and takeout the company. It is simple to realize that how an exceedingly nonjudgmental takeout strategy may lower a company’s market price. Prospective investors may come to a point that this type of action might lowered the company’s growth which in terms become a liability for everyone and these investors may lose their interest over the company.
On the other side, handing over too much control to minority shareholders may guide to a holdout crisis, by unmanageable dissenters trying private payouts before approval of a valuable joining. Though minority shareholders don’t maintain a clear refusal over the business deal, liberal corrective statutes or very strict values of appraisal might become a risk of costly strike backs. The legal challenge is the main key for balance the boundaries of majority domination and minority propose.
In several cases, Minority shareholders may faces unexpected problem[6] which makes the company to run in loss though this type of situation is created not to hurt the minority shareholders but the company by the majority. As an example, change of contracts from the company to the directors individually.
Minority shareholders may face unattainable charge when they try to force company executives or directors for bringing a deed not in favor of them. Sometimes court allowed minority shareholders to claim against the company.
Balancing the system
Protecting minority shareholders
As the lawful action of shareholder safety finds its equilibrium in linking rational majority dominance and protecting minority interests[7], it put itself in a sticky position of permanent ancient area where the laws and instruction could no longer be able to come up with simple legal decision but requires courts involvement for even the most minor cases. But in this type of situation too much lawsuits by minority under the fact of minority protection may bring down the legal court system and also discourage investments when cases push them. Extreme-protection may also lead to misuse by minority shareholders to intentionally make use of their rights to generate obstacles for company and directors in running the company’s daily operations and also may creates an embarrassing situation for the management team. Therefore the need to make sense of balance by given that sufficient avenues for equalize while preventing controversial shareholders from taking advantage of lawsuits.
Even though the courage of the law is to make sure even-handed dealing of all shareholders, the company act is always straggled to maintain the uphold rights of majority and yet protect the minority. Well, theoretically company law do offer minority shareholders the opportunity for equalize, its natural favour in the direction of majority happiness and the complexity of minority shareholders complainant in proving deception present little promise of an satisfactory screen for minority investors.
Some basic Company Laws regarding shareholders
Every company around the world do have a law for protecting their minority shareholders. They also do have laws to ensure the rights of majority shareholders. Followings are some of the basic laws within a company for their stakeholders.
- Information disclosure and audit
Company law makes sure that the standard accounting information is needed to be supplied for the shareholders and also the audit reports made by the auditors[8]. It also must make sure that whenever shareholders sought for any sort of agreement, the company needs to provide all the facts and materials whichever is connecting to the matter. Disclosure does not by itself offer the means to obstruct the main shareholders, but it is a requirement for the minority shareholders to be capable to use any of the other way obtainable to them. Disclosure is as well a very important part in the capability of the investment market to implement its control on the issuers of funds.
- Voting Rights
Shareholders hold broad meetings on an annual basis or at fixed times according to the company laws. The main reason of these meetings is for shareholders to select the directors of the company, however shareholders may also vote on a number of supplementary issues. individuals with right to do so may also call special meetings on facts that need instant consideration, though only those issues set forward in the note of the special meeting might be the subject of the vote.
A specific reason must be present at the shareholder meeting for necessary decision. The usual quorum must have the combination of half of the outstanding shares of the company. This percentage could change if the company law is changed. For each shareholder meeting, a list of shareholders entitled to vote must be organized. Each and every shareholder has the right to check the list at any time.
- Protection of minority shareholders.
Company law provides for an additional answer if the minority shareholders can prove that the company’s dealings are being conducted in a way that damaging the security of the company or its shareholders to such a degree as to construct it just and reasonable to wind it up[9]. For this kind of situation shareholders can go to the company law tribunal instead of court. The Company Law Tribunal which is consist of a quasi-judicial body can make appropriate decision if it is fulfilled that it is just and fair to wind up the company on these basis, but that such twisting would illegally discriminate the members. Well, the board may control the conduct of the company’s relationships in future, instruct the takeover of the minority shareholders by the other shareholders or by the company itself, set apart or change certain contracts entered by the company, or assign a receiver.
- Special majority
One more protection in the company law is the condition that certain key decisions have to be permitted by a particular majority of 75% or 90% of the shareholders by worth. This may not be a helpful protection where the principal shareholders hold a huge majority of the shares so they need only few of the minority shareholders approval to reach the decision making percentage. Even otherwise, it may not be a sufficient defends if the course of conducting shareholder meetings is not favourable to broader involvement by a big part of the shareholding public.
Implication of justified Corporate Governance and Frameworks
Corporate governance[10] is a key concern for all public and private company and their shareholders. With rising commercial and financial globalization, corporate governance has worldwide significance in developing countries and also for the overall economic powers.
Corporate governance is all about stability and balance. It is about balancing the benefit of shareholders with those of other shareholders in an organization. It may also include the – suppliers, clientele, investors, workforce and the society. The main theme that it came up with maintaining balance of company’s short-term needs with long term needs and also investors within the company.
Corporate Governance Frameworks
The corporate governance framework within a company is the core system of risk management, regulations, laws, and their practices relate where it operate.
Public policy makers and companies around the globe see the affects of corporate governance and are setting deadlines for faithfulness to their own ideal corporate governance frameworks. Some key components of corporate governance framework is,
- Safeguard the rights to vote of shareholder and control serious company strategies.
- Strengthen company boards by appointed skilled employee.
- Came up with techniques that protect weak spot of management teams.
- Broad exercise of international accounting standards.
- Greater expose of executive compensation.
- Protecting minority shareholders from being accused.
- Preventing majority shareholders from misusing their power.
- Maintaining and communicating information between majority and minority shareholders.
Some further steps for companies to balancing shareholders rights and for productive function
1. Discovery of holding of majority shareholders
The ownership structure of a company is of huge importance for an investor’s decision; particularly with observe to the reasonable treatment of shareholders. In order to make an important investment decision about the company, investors need the right of entry to the information concerning its possession structure. It is recommended that this disclosure includes the deliberation of shareholdings, as an example the shareholding percentage of the top fifteen shareholders. This information is basically in interest for the minority shareholders. In many countries disclosure is necessary when assured thresholds of possession are approved.
2. Revelation of the control structure
Disclosure should be made by the organize constitution and how shareholders or other individuals of the company can work out their control rights through voting or other way. Any deal under which several shareholders may have a scale of unequal control to their equity ownership, whether through the discrepancy of voting privileges, appointment of directors should be disclosed. Any particular structures or actions which are in position to look after the interests of minority shareholders should be disclosed.
3. Practices for compliance
Where there is a limited policy on corporate governance, company should follow a “obey or clarify” regulation whereby they reveal the degree to which they followed the local code’s recommendations and make clear any deviations. If there is no local policy on corporate governance, companies follow standard international high-quality practices. The use of “obey or clarify” system in many countries gives the investors a better access to the company information and it is also encouraged by the authorities. In relative to this regulation, some countries now want companies with overseas listings to disclose the scale to which the local governance practices to vary from the principles of foreign listing.
4. Using Financial Institutions as a safeguard
It is regrettable that the local economic institutions acting like inactive and never then less a role by they are particularly unable to manage their basic powers in case of huge minority shareholders and as prospective safeguard. The obvious collapse of government controlled financial institutions to watch companies in their double capability as main creditors and main shareholders has much to do with a enveloping anti-incentive formation. For the problem with this financial institutions needs to be solve to attract the investors and making them feel secure in a way that they willingly accept and cope with their relative company. Well government might also consider privatizations of financial institutions for a better progress. It also give the shareholders some sort of support on when company fall in a financial deficit.
5. Debt Holders awareness
One of the main characteristic of the capital market is the dominant disciplining power of debt. Nothing like the shareholder who is an outstanding applicant, the debt container has contractual privileges to be given his/her principal and interest. Also the debt holder has the power to monitor the operations of the company. Many harsh and unorganized instances of corporate mis governance decrease the potential income flow of the company and may also reduce the value of the company assets. These things basically lessen the capability of the company to examine its debt in agreement with contractual obligations. That’s why most of the dept contracts should entail some covenants that make it hard for the majority shareholder to treat in foul abuses. Debt holder’s ability to implement their rights against unmanageable debtors sometimes might hold back by an ineffective legal system. Investors have difficulties to exclude mortgages, grab security or gain decrees. Moreover, most of the times the corporate bankruptcy laws work not in favor of the investors by allow the debtor to continue in possession of the property for a extended time while compromises or any other planning’s came up. This awareness will always help the shareholders about their ability and managing their powers to make the company profitable.
6. Capital market and its Prospective
Within a well running capital market[11][12], there is a strong reason for corporate managements themselves to willingly accept visible processes and subject themselves to outside monitoring to encourage probable investors. This will formulate capital market regulation much more attractive than narrow involvement what is unlike the supervisory body. Capital market is a very good place for came up with a micro level decision in fact this market is determining most of the micro level decisions. A well functioning capital market is a good allocator of investors to choose a company to invest and where the company law will going to help them to protect their own rights whether the investor is belongs to the majority or minority shareholders. It is also the place where shareholders can judge their own company’s productivity.
7. International Accounting Standards
The acceptance of international accounting standards[13] in the company will may become very much productive. It will give the shareholders the opportunity of enjoying grater disclosures and more clear governance practices. It will represent the company as they are aware of their shareholders and their rights. It will ensure the shareholders that their rights will be protected which in terms lead the company to a productive path.
CONCLUSION
Regardless of enlarged constitutional rights and usefulness of corporate governance to protect minority shareholder against unfair activities by their majority cousins, no system can completely defend any investors if the playing pitch is misted up by unequal ethical standards and lack of respect for common law and agreements. Ultimately, it is must be the concern of everyone within a organization to preserve a proper balance of rights within their shareholders to make them feel safe in return shareholders will work together for the productivity and they will also make sure the functioning of the company is being maintained.
Works Cited
Anonymous (2003), Minority Shareholders and Their Rights. Retrieved on March11, 2011, retrieved from
http://www.accaglobal.com/archive/inpractice/62/1047930
L. Timmerman and A. Doorman (2002), RIGHTS OF MINORITY SHAREHOLDERS IN THE NETHERLANDS. Retrieved on March11, 2011, retrieved from
http://www.ejcl.org/64/art64-12.html
George S. Geis (2009), Managing the Governance Tension Between Majority and Minority Shareholders with a Novel Financial Instrument. Retrieved on March11, 2011, retrieved from
http://legalworkshop.org/2009/11/20/internal-poison-pills-managing-the-governance-tension-between-majority-and-minority-shareholders-with-a-novel-financial-instrument
Anonymous (2009), Principles of Corporate Governance. Retrieved on March11, 2011, retrieved from
http://www.estandardsforum.org/bangladesh/standards/principles-of-corporate-governance
Anonymous , Shareholder Rights. Retrieved on March11, 2011, retrieved from
http://www.enotes.com/everyday-law-encyclopedia/shareholder-rights
Anonymous , Majority rule and minority shareholder protection in joint stock companies in england and iran. Retrieved on March11, 2011, retrieved from
http://www.proyectosfindecarrera.com/es-majority-rule-and-minority-shareholder-protection-in-joint-stock-companies-in-en-44.htm
Anonymous , Corporation Law. Retrieved on March11, 2011, retrieved from
http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1ARTA0001938
Anonymous, Buy A Share: Market Investment For Ownership Privileges. Retrieved on March11, 2011, retrieved from
http://www.finweb.com/investing/buy-a-share-market-investment-for-ownership-privileges.html
J. W. Verret (2010), conflicts-between-institutional-investors-and-retail-investors-using-federal-securities. Retrieved on March11, 2011, retrieved from
http://mercatus.org/publication/conflicts-between-institutional-investors-and-retail-investors-using-federal-securities
V. Mike, the SHAREHOLDERS AGREEMENT. Retrieved on March11, 2011, retrieved from
http://www.sfu.ca/~mvolker/biz/agree.htm
Anonymous, what is a Shareholder Agreement? Retrieved on March11, 2011, retrieved from
http://www.clerwoodlegal.com/what-is-a-shareholder-agreement.html
Wachtell, Lipton, Rosen & Katz, The Share Purchase Rights Plan in Ronald J. Gilson & Bernard S. Black, The Law and Finance of Corporate Acquisitions (2d ed. Supp. 1999)
LA Bebchuk, JC Coates and G Subramanian, ‘The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy’ (2002)
[1] The spirit of corporate citizenship suggests that a company that derives profit from the community has an obligation to contribute to its development. It is reasonable to expect the principle of mutual obligation to apply to the business sector. John Howard, Prime Minister of Australia, 1998
[2] Shareholder Agreement is a legally binding arrangement entered into between each of the shareholders in a company by which they agree how their relationship as shareholders will be regulated.
[3] The rights of ownership are a chief difference between common stock owners and bondholders of the company. With equity stake in the company a shareholder can have influence over the management of the company. A bondholder is a creditor who receives priority claim to assets when a company declares bankruptcy and liquidates its assets.
[4] A corporation has separate legal personality in the sense that it is a legal person separate and distinct from its shareholders, directors and officers. A corporation may enter into contracts and own property in the same manner as a natural person. The corporation may also sue and be sued in its own name. Because a corporation is considered to be a separate legal entity, it may enter into contracts with its own shareholders. A corporation may also be convicted of a criminal offence provided that the criminal provision provides for a fine in lieu of imprisonment.
[5] Shareholders have two available remedies if they become dissatisfied with the performance of their companies. Shareholders can sell their shares, or they can vote for an alternative nominee in the next annual election of the Board. They do both with some frequency. In the rare event that political advocacy actually results in corruption, there is a third line of defense in place. If the Audit Committee of the Board of Directors, which is independent of company management, determines that any political donations are inappropriate they are required under the Foreign Corrupt Practices Act to stop them immediately.
[6] Minority shareholders can be unfairly treated by majority shareholder or company directors. Precedence of such cases is widespread in the business world. Although protection mechanisms existed for a long time, these laws have not effectively deterred minority prejudice and abuse. Based on a study commissioned in Apr 2004 by Jardine Lloyd Thompson Pte Ltd, there were a total of 19 cases of minority shareholder claims (personal and derivative) for oppression under Section 216 of the Companies Act.
[7] According to the 2003 BEI report, the Companies Act of 1994 provides adequate protection for minority shareholders, especially Section 233. However, most shareholders do not know about Section 233 and other minority shareholders rights. The assessment recommends increased minority shareholder participation. There are a number of provisions for the protection of minority shareholders. Minority shareholders with at least 10 percent of shares may take court action against the company. However, exercising minority shareholder rights may be costly, and proving a director is at fault is difficult. The SEC protects minority shareholders, sometimes overzealously, at the expense of the majority shareholders in listed companies.
[8] In Bangladesh, company disclosure to shareholders and the public is the only mechanism that shareholders and investors have to evaluate a company’s performance and oversee the activities of the board. The 2003 BEI report points out the importance of strict enforcement of regulations pertaining to disclosure. However, disclosure is often inaccurate and incomplete. The law requires that books recording the company finances be kept at the registered office and be available for inspection by government officials. Sanctions for noncompliance include fines and imprisonment. The report judges company disclosure based on the requirements of the Bangladesh Accounting Standards (BASs) as “inadequate” (p. 26) and “not consistent” (p. 54), with practically no consequences.
[9] The Investor Protection Index is a subcomponent of the World Bank’s 2009 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), and shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index).
[10] According to a 2007 OECD overview of corporate governance frameworks in Asian countries, Bangladeshi legal framework is governed by the Companies Act. The BEI Corporate Governance guidelines and the 1987 SEC order supplement the existing framework. The Siddiqui paper notes that the Companies Act 1994 (revised after 81 years from Companies Act 1913, when Bangladesh was part of British-India) defines the structure of the firms, including the composition of the board of directors, appointment of the CEO, appointment and remuneration of the auditors etc. Additionally, the financial sector is regulated by the Banking Companies Act, and the Insurance Act
[11] The 2008 ADB memorandum notes that Bangladesh’s capital market is still underdeveloped, despite recent improvements. Siddiqui explains that most companies in Bangladesh are either family-owned or controlled by substantial shareholders (corporate group or government). “Company managements are effectively just extensions of the dominant owners,” (p. 8)
[12] The capital market in Bangladesh is regulated by the SEC. Established in 1993, the SEC’s objective is to protect the investors, promote and develop capital markets, and regulate the securities market. In 1999, the ADB initiated a US $ 1.07 million project to strengthen the regulatory capacity of SEC. Other regulatory agencies include the RSJC, the Bangladesh Bank, the DSE, the CSE, and the ICAB. The BEI report points out many weaknesses in the SEC and RSJC as regulators, including insufficient staff and expertise.
[13] On January 25, 2001, the International Accounting Standards Foundation (IASF) was incorporated as a tax-exempt organization in the US state of Delaware. On February 6, 2001, the International Financial Reporting Standards Foundation was also incorporated as a tax-exempt organization in Delaware. The IFRS Foundation is the parent entity of the International Accounting Standards Board (IASB), an independent accounting standard-setter based in London, England.
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