Law Firms Capital.
A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company.
Introduction:
Industries play a vital role in the development of a country’s economy. These industries are either manufacture or service oriented, and provide employment opportunities. A number of public and private companies operate in an industry, which may manufacture the same goods or provide the same services, but follow different strategies and guidelines to operate their businesses. Most public and private limited companies sell shares in order to generate funds to start up or run their business, and these shareholders are the legal owners of a company.
Generally, the ones who own the majority of shares have more influence on decision making of a company. Therefore, a proper balance of rights of majority and minority shareholders is required for the welfare of a company.
Shareholders and their Rights:
A shareholder, also known as stockholder, is someone who is a legal owner of a limited liability company.[1] Although shareholders are known as owners of a company, they can only claim for the stock which they actually own, but not the company itself (Fama 1980) [2].
Shareholders maybe given specific rights based on the types of shares they own which they can exercise when required. A few of the rights are mentioned below:
- Right to sell off shares if there is a buyer
- Vote, and elect directors nominated from the board
These shareholder rights depend on the corporate governance policies of a company. Different companies have different policies and the shareholders should go through those policies and be aware of their rights.
Majority and Minority Shareholders:
Majority shareholders are those who own more than fifty one percent of the outstanding shares of a company.[3]
Minority shareholders are those who own fifty percent or less numbers of the outstanding shares of a company.
The majority shareholders have the most advantages. They have the power to replace a company’s employees and even the board of directors. To protect such advantages over the minority shareholders, the majority shareholder are even willing to pay for a control premium.
Issues Surrounding Majority and Minority Shareholder:
Companies nowadays are offering stock options to their employees for their outstanding performance. Though such stock offerings could be very attractive to the employees and create incentives to give better output, they also create another segment of minority shareholders. For example, business associates, family and relatives. When majority shareholders use the company to dominate the minority shareholders, it would most likely be a legal concern.
Generally, shareholder agreements or corporate governance policies of a company often include shields for minority shareholders.
The owners of a company are its shareholders and the majority shareholders, who often influence in decision making and control the management, is responsible to exercise their powers with honesty, to the minority shareholders. Oppression can take many forms, from which one would be the misuse of assets or the mismanagement of funds. Such behavior might cause major loses to the company shareholders like granting loans or allowing the shareholders to use company funds to pay off personal obligations. This may result in the elimination of earnings of the minority shareholders.
Also, during major transactions like mergers or acquisitions that take place in a company, it is essential that the majority shareholders should treat the minority shareholders with fairness. Moreover, such transactions must take place only with valid business reasons, and disregarding the personal interests of the majority shareholders. The company must disclose all facts and circumstances regarding the transaction to the minority shareholders.
The charges on oppression are taken very seriously and handled strictly by the courts. The consequences could be very severe, and in extreme cases the violation could result in dissolution of a company, but most countries have a bad track record in enforcing such laws and regulations.
Perceptions of Majority Shareholders:
The minority shareholder issues can be addressed in two ways. One is when you are the minority shareholder, wondering how to get better treatment or get bought out; and the other one is where you are the majority shareholder wondering how to deal with a minority shareholder.
In any analysis of “what to do,” Mary Hanson has advised to look at both sides of this issue. She says, “It is not as one-sided an issue as it may seem. The minority shareholder who feels trapped needs to understand the perspective of the majority shareholder.”[6]
The majority shareholder usually wants to get rid of the minority shareholder. A few of the concerns of majority shareholders could be that:
- The majority shareholder has been working really for the growth of the company. But having a minority shareholder who is not working as hard as the majority share holder, reaping benefits from the majority shareholder’s efforts could be a real burden to the majority shareholder.
- The majority shareholder would have invested more money on the business but reluctant to do so as there are other shareholders or investors as well.
- They would try to buy it when the price is low, expecting to get higher returns in the future.
Not every majority shareholder works for the welfare of a company. They may even come up with unethical or illegal practices to take away the business from the minority shareholder, for instance:
- Moving the company’s assets away from its current business and starting another business, attracting all the customers towards the new business.
- Terminating employment of a minority shareholder who may have earned the shares as a reward for his performance in the company
- Issuing more stock, outweighing the minority shareholder’s contribution.
Such actions maybe exercised due to several reasons, but if it done for the self-benefit or interest by squeezing the minority shareholder, then it is unethical conduct and is highly discouraged.
The minority shareholders have to pay taxes just like the majority shareholders, even if there are no profits, or when the profits are reinvested in the company. Paying tax is mandatory for any individual who earns or invest in a business. Being the majority, it is easier to adjust tax payments by assigning themselves high salaries as they have complete control on the management, but the minority is helpless and can do nothing about it.
Corporate Governance:
The World Bank’s corporate governance assessments have revealed that there is a growing concern around the world regarding corporate governance’s importance.[7] The majority of the countries who have been assessed are upgrading their legal and regulatory structures under the Organization for Economic Co-operation and Development’s (OECD)[8] principles of corporate governance[9].
If we look at the country Romania that undertook mass privatization, as their vouchers were free, new shareholders did not consider themselves as owners of the company and neither were they treated as investors by the private companies. It resulted as minority shareholders’ widespread expropriation. The situation changed when the shareholders raised their voice. Romania lately undertook regulations that significantly reinforce rights of the shareholders.
Even today, changing laws and regulations is a very slow process and it takes a lot of cooperation and negotiation. It was a major issue for Brazil on how to treat minority shareholders during the change of control. Initially, the corporate Law Firms Capital granted voting power to all shareholders[10]. In 1997, the rights from minority shareholders were withdrawn in order to maximize revenues of the state resulting from privatization[11].
Defining Corporate Governance, its Importance, and Benefits:
Companies are legal business entities and are separate from its owners. Once a company is properly established, the owners who are shareholders of the company can not be held responsible for the activities of the corporation. This means that no legal action can be taken against the owners of the company even if it is at fault, as both are separate entities. The process and design of how a company should be managed is known as corporate governance.
Many small business owners give less importance to or even ignore corporate formalities like annual shareholders’ meetings and director and officer nominations. But large corporations give it the most importance due to the magnitude and complexity of their business. The point is, it is not only necessary for the large firms, but small firms should also practice corporate governance in order be to attain and then retain success in the long run.
Managers as well as majority shareholder may seek to work for their own benefit, using funds of the minority shareholders. Such separation may lead to a lack of information on how the funds are being used. Therefore, one of the most important factors in corporate governance is assigning the rights of shareholders, which will also allow them to have a better look at where there money is going.
Companies heavily depend on external funds to finance their activities, investment and most importantly, growth. This will not only help the shareholders, but also have a positive impact of the company’s growth.
A number of international corporate governance principles have emerged lately. A few of those principles are:
- Shareholder rights as they should be informed about the company’s operations; should be able to participate in offering resolutions and decision making; and should be able to claim dividends when declared;
- Fair conduct to the shareholders, mainly to the minority and foreign shareholders, by disclosing detailed information about the company’s operations and activities;
- Timeliness and accuracy while disclosing information and clarity on every material of company ownership, performance and the stakeholders;
- The responsibilities of the managerial board, the management supervision and accountability to the company and its shareholders. [12]
The company is however responsible for implementing a sound system of corporate governance within the company. The company should realize that a system of good corporate governance will result in success of its shareholders and the company itself. The companies should also understand the consequence of breaching the corporate laws enforced by the state, which may also lead to failure.
Some benefits that can be obtained with the application of corporate governance are as follows:
- It would be easier to raise capital;
- The cost of capital would be lower;
- Improvement in business and economic performance;
- Good impact on share price.
Corporate Law and the Companies Act 1985 (s459):
It is a fundamental challenge and a very difficult talk to design a perfect legal system, also attempting to promote economic growth at the same time. It mostly depends on a country’s entire legal infrastructure. Corporate law previous used to focus mainly on public interests and had less focus on the shareholders, but the rights of shareholders has become a big concern today.
By definition, taken from Wikipedia, “Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another under the internal rules of the firm. A major contributor to company law in the UK is the Companies Act 2006.”
Generally, the basic rule in corporate law is that the majority rules. The number of shares owned determines the voting rights. If someone holds more share than the others, his decision counts the most and can dominate all the other shareholders.
United Kingdom law, Section 459 of the Companies Act 1985 (s459)[13], is one of the major safeguards to protect the minority shareholder’s rights in of a company from the majority shareholders. This section of law enables the minority shareholders to challenge the majority shareholder’s actions in a court of law, in situations where it is of the last resort.
Conclusion:
The conflict between the minority shareholders and majority shareholders is one of the major reasons behind the dissolution of a company. It is evitable when there is mistrust and lack of communications between the managements and the members. For the sustainability and growth of a company, implication of proper corporate governance is mandatory.
Bibliography:
Protecting Shareholders Companies Act. In Law Essays UK.
Retrieved on March 12, 2011, from http://www.law-essays-uk.com/resources/free-essays/protecting-shareholders-companies-act.php
Shareholder Disputes. In Shareholder Rights.
Retrieved on March 12, 2011, from
http://www.shareholderrights.co.uk/disputes_nf.htm
Hanson, M. (n.d.) The Minority Shareholder: What a shareholder can do.
In Business Advisor. Retrieved on March 12, 2011, from
http://bizadvisor.com/MinorityShareholder.htm
Definition of Corporate Law. In eHow. Retrieved on March 12, 2011, from
http://www.ehow.com/about_5426387_definition-corporation-law.html
Corporate Governance. In Wikipedia. Retrieved on March 12, 2011, from
http://en.wikipedia.org/wiki/Corporate_governance
Knowing Your Rights as a Shareholder. In Investopedia. Retrieved on March 12, 2011,
From http://www.investopedia.com/articles/01/050201.asp
Protecting the rights of the minority shareholder. (Legal Issues). In AllBusiness.com.
Retrieved on March 12, 2011, from
http://www.allbusiness.com/government/government-procurement/119739-1.html
What is Corporate Governance (2006). In FCGI. Retrieved on March 12, 2011,
from http://www.fcgi.or.id/en/aboutgc.shtml
Minority Shareholders (August 2003). In Public Policy for the Private Sector. Retrieved on
March 12, 2011, from http://rru.worldbank.org/Viewpoint/index.asp
[1] From “Who are Shareholders?” available at http://www.blacksacademy.net/content/4170.html. Retrieved on March 12, 2011
[2] Shareholder. (n.d.). In Wikipedia, from http://en.wikipedia.org/wiki/Shareholder. Retrieved March 12, 2011.
[3] From http://www.lion1234.dreyfus.com/cgi/inet/invest_glosry.trn. Retrieved on March 12, 2011.
[4] From http://moneyterms.co.uk/minority/. Retrieved on March 12, 2011
[5] What is a Majority Shareholder, available at http://www.wisegeek.com/what-is-a-majority-shareholder.htm. Retrieved on March 12, 2011
[6] Mary Hanson is a business attorney in Torrance, California (Los Angeles County).
[7] For more on the World Bank’s corporate governance assessments, see http://www.worldbank.org/ifa/rosc_cg.html.
[8] OECD is an organization that coordinates policy among developed countries. OECD member countries exchange economic data and create unified policies to maximize their countries’ economic growth and help nonmember countries develop more rapidly.
[9] A set of nonbinding standards against which countries’ performance can be measured
[10] Equal treatment in a change of corporate control, ensuring that the control premium is equally distributed among majority and minority shareholders
[11] Corporate governance principles collected from Forum of Corporate Government in Indonesia (FCGI) website.
Section 461 of the Companies Act 1985 further provides that the court has discretion to apply the remedy it thinks fit when considering a case under s459. Possible remedies might include an order that the majority shareholders purchase the shares of the minority at fair value.
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