Balancing Rights of Majority and Minority Shareholders

“A proper balance of the rights of majority and minority shareholders essential for the smooth functioning of the company"-explains & illustrate."

1. Introduction:

A share holder can be defined as an individual or company (including a corporation) who legally owns one or more shares of stock in a joint stock company. Both private and public limited companies have shareholders. They are the all of a company.

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 ( [1] ).

Stockholders or shareholders are well thought-out by some to be a division of stakeholders, which may include anyone who has a direct or indirect concern in the business entity. Such as, labor, suppliers, customers, the community, etc. they are usually considered stakeholders due to contribution of value and are affected by the corporation.

Based on the class of stock shareholders are granted extra privileges. It also includes the rights of the voting for example- election to the board of directors, the rights to buy new shares issued by the company, the right to a company's assets during a liquidation of the company, the rights to share in distribution of the company’s returns.

Shareholders in the primary market who buy IPOs provide capital to corporations; however, the vast majorities of shareholders are in the secondary market and provide 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. [2] , [3] 

2.Shareholder rights:

Though the company is considered a legal person, thus it owns all its assets itself. The Shareholders do not have the right to use a company's building, equipment, materials, or other assets. A large percentage of ownership of shares does not give the whole power to the shareholders. For that, in the areas of insurance is taken with the name of the company and not the name of main shareholder.

In almost all the countries in the world, company managers and boards of directors have a fiduciary responsibility to carry on the company in the interests of its stockholders. Martin Whitman argued that-

...it can safely be stated that there does not exist any publicly traded company where management works exclusively in the best interests of OPMI [Outside Passive Minority Investor] stockholders. Instead, there are both "communities of interest" and "conflicts of interest" between stockholders (principal) and management (agent). This conflict is referred to as the principal/agent problem. It would be naive to think that any management would forgo management compensation, and management entrenchment, just because some of these management privileges might be perceived as giving rise to a conflict of interest with OPMIs. [4] 

The shareholder has some affect on the company's policy Even though the board of directors runs the company, such as-the shareholders vote for the board of directors. Each shareholder usually has a percentage of votes regarding his or her percentage of share amount. So as long as the shareholders concur that the management (agent) are performing bad they can select a new board of directors which can then appoint a new management team. In real life, actually contested board elections are hard to find. Board candidates are generally chosen by insiders or by the board of the directors themselves.

Depending on the class of stock stockholders are granted special rights. They are-

The right to sell their shares.

The right to vote on the directors selected by the board.

The right to elect directors (and recommend shareholder resolutions.

The right to dividends if they are declared.

The right to obtain new shares issued by the company.

The right to what assets remains after a liquidation.

If a company goes insolvent and has failure to pay the loans the shareholders are not legally responsible to pay that. Owning shares does not mean responsibility for liabilities. However, all money obtained by changing assets into cash will be used to pay back loans and other debts first, but the shareholders cannot obtain any money until creditors have been paid.

3.Types of Shareholders and types of stock:

Shareholders may own two kinds of stock. They are-

Common stock- Common stock does not have a fixed value. Owners of common stock have the last argue to company profits and assets and they may get dividends at the caution of a company's board of directors. For that when company performs well owners get profit, and suffers losses when company does not perform well.

Preferred stock – owners of preferred stock have first claim to a company's profits and assets. [5] 

There is also redeemable and convertible stock. Redeemable stock allows a company to repurchase it at some point, whereas convertible stock enables stockholders to exchange preferred stock for common stock.

Shareholders are generally classified as individual investors or institutional investors.

Individual Investors - are those who invest their own money.

Institutional Investors- are those organizations that invest the money of others. They become major players in the long-term investment market. Such as- insurance companies, banks, pension funds, and investment companies.

4.Rights of Majority shareholders-

The majority shareholder is the individual who owns most of a company’s shares. A majority shareholder generally own more than 50 percent share of a company. They are those people who have bought interests in a company that makes them partial owners of the company. They can generate more power rather than the other combine shareholders. He or she has the power to do things that other shareholders do not have the authority to do. Such situations are usually more common with private companies than with public companies.

They may have the right to attend annual meetings, bring resolutions, and vote on matters regarding operations.

Participation in annual meeting:

This will depend on what the shareholder has in mind and what the other shareholders, who constitute the majority, are agreeable to. Majority shareholders have the right to participate in annual board meetings, as well as general meetings. Besides 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 acquired through entering into a contractual agreement with the other shareholders. For this, rights can be formed which are not otherwise accessible on the basis of the Memorandum and Articles of Association.

Veto power

Majority shareholders have the veto power on all decisions. Whilst such a condition would empower the director concerned, it could inhibit decision-making and may sometimes not be in the best interest of the company.

Many crucial and important decisions have to be made in general meetings. General meetings fall under the category of Annual General Meeting and Extraordinary General Meeting. Annual general meetings are a requirement of the law where certain matters must be dealt with annually. If an annual general meeting is not held, there is a breach of the Act.

All other matters can be dealt with at extraordinary general meetings. Such meetings are not by law mandatory but are required to be held for other business to be dealt with. It would be permissible for such a shareholder to give himself the rights as are discussed in the context of directors meeting with regard to an extraordinary general meeting.

Minority Shareholders:

Major re-organizations: A minority shareholder has the right to disagree to a) the alteration of the corporate articles to revise the provisions concerning to the issuance or shift of shares, or to modify or take away any constraint on the business the corporation may carry on; b) the merging of the corporation with a corporation that is not a additional or parent; c) the maintenance of the corporation in another jurisdiction; or d) the corporation selling, hiring or exchanging all or significantly all of its property. Shareholders are permitted to compel the corporation to buy their shares for a cost as determined by the Court, giving the rebellious shareholder has followed the proper procedures.

Derivative actions: A shareholder (as well as creditors) may apply to the Court for leave to carry out such a law suit in the name of the corporation. I. This is often used where the directors have not acted in the best interests of the corporation and thus may have incurred a personal liability to the corporation.

Oppressive actions [6] : If a minority shareholder feels that the business of the corporation has been carried on with purpose to deceive any person, or the powers of the directors have been exercised in a way that is oppressive, unfairly injurious, or that unlawfully disregards the minority shareholder's interest, he/she may apply to the Court for an perfect solution. In such cases, the Court has widespread powers to accurate the wrong, including-

limiting the conduct complained of,

pointing or replacing directors,

directing the corporation or any other person to buy the complainants shares;

appointing a receiver-manager,

requiring the company to construct financial statements or an accounting, xi) compensating the aggrieved person,

directing modification of the company's records,

liquidating and dissolving the corporation,

moneys paid by the accuser for his shares,

adjusting the articles or bylaws of the company (even if such amendments would break the provisions of a unanimous shareholder's agreement);

directing an matter or replace of shares;

directing the corporation to pay dividends to its shareholders or a class of shareholders,

setting aside a transaction or contract to which the company is a party,

Directing an investigation of the affairs of the corporation.

5.The effect of the increasing power of majority shareholders upon minority shareholders:

Majority shareholders are often wishing to act in ways that may annoyance the minority. For example, it may be in the majority's concern to gain the whole control of a company by acquiring the minority's shares. Similarly, without expropriating the minority's shares the majority may want to raise their control. The majority may try to exclude the minority from involvement in future privileges issues. In these kinds of circumstances, however, there is probable to be substantial ambiguity as to the risks that the implement of the majority's power will be open to dispute by the minority. David Chivers and Ben Shaw argued in their- book that- [7] 

There are many different ways in which majority shareholders may work out their power to expropriate shares from minority shareholders. It then analyses each of these methods and suggests conduct of reducing the risks that such actions of these methods may be challenged by disaffected minorities. Methods of expropriation included in this section include:

the introduction of expropriation provisions into a company's articles of association

schemes of arrangement under s 425

compulsory acquisition of shares under ss 428-430.

Further, the authors consider ways in which majority shareholders may control minority shareholders without expropriating shares from them. Topics in this section include the majority's power to vary rights attached to the minority's shares and to exclude the minority from participation in rights issues.

Grounds for Dispute between majority and Minority Shareholders[ [8] ]:

There are some Common Reasons for majority and minority Shareholders Disputes which causes a great harm to the company-

exclusion from meetings

breaches of shareholders agreements/ partnership deed[ [9] ]

separate business interests

failure to provide financial, accounting and statutory information

breach of directors’ duties

the company’s strategy & management

dividend policies

disparities between salaries

6.The importance of a proper balances the rights of majority and minority shareholders:

A proper balance the right of majority and minority shareholders is essential for the smooth functioning of the company. We know that shareholders are owners of the company and because they embrace huge power, the management of public companies faces two continuing tasks: (1) maximizing the profit of shareholders. (2) Meeting shareholder needs and providing share-holders with information on company performance and plans, and providing shareholders with both of these is the spirit of shareholder relations—and one without the other usually will not succeed to assure shareholder demands. administration also profit from putting forth effort to develop a knowledgeable pool of shareholders who are up to date about company activities and goals, who will support management decisions, and who have realistic hope of the company's potential. Therefore balancing of the rights of majority and minority shareholders is necessary for the welfare of a company. A company should follow the following steps to make a balance of both the rights of shareholders-

Buy-Outs

The distressed minority shareholder may want to sell his shares. Ideally, the majority shareholder is willing to buy at a fair value. If not, the Articles of Association may give the minority shareholder the right to entail the company to buy its shares at a fair value fixed by the auditors, or (more rarely) the right to bring to an end the company.

Without such mechanisms in the Articles of Association or in a shareholders' agreement, the minority shareholder may find himself protected in to the company at the mercy of the majority shareholders.

Buying out a minority shareholder holding a major percentage of the shares may compel severe financial injure on the other shareholders and the company. Where a public company proposes giving financial help to the other shareholders, this may be barred financial assist and expert professional opinion should be in use at the outset.

Demerger

Where a company has detached businesses, it may be feasible to demerge the business so that the company is divided with the two businesses owned by separate groups of shareholders. There may be other process by which the assets of the company can be disseminated to the participants by way of settlement. Any such provisions have complex company law and taxation implications and these should be explored at the outset.

Dissolution

A shareholder can also solicit the Court to wind up the company on basis that it is just and equitable to do so under the Insolvency Act 1986 [10] . There is no simple description of what conditions make it “just and equitable" for a court to wind up a company.  Each case will turn on its facts.  In a small company which in practice operates as a partnership between two or more participants who are both shareholders and directors, winding up may be the most striking option. This process involves liquidation of the company and is not an attractive method to tenacity an internal dispute, it should be used only where all else fails.

It an equitable remedy which is in the court’s discretion.  This means that a person seeking the remedy must come to the court with “clean hands".  If they have done something to cause the damage then the court is much less likely to assist.

Expectations

Finally, there is the other phase where either as a introduction to giving up majority control or assuming minority interest, the shareholder may have been given an assertion of least amount outcome that will be achieved by those now otherwise in control of the company. [11] 

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

Shareholder relations responsibilities cut across a company,. Some companies develop special investor relations departments to handle these responsibilities and make a balance, while others divide them among various departments. Either way, management must set specific goals when developing a shareholder relations program and management can establish these goals by determining what support it seeks from shareholders and what shareholders think of the company, according to H. Peter Converse in his article for Investor Relations: The Company and Its Owners [12] . Since every company is unique to some extent, the goals and methods for achieving the goals will vary from company to company.

7.Conclusion:

By implementing balance between shareholders right, companies also can achieve their business goals of advancing company growth and profitability. Through mutual understanding between shareholders, can increase the ability to raise funds via stock offerings, offer a viable stock option program to court talented executives, and avert hostile takeovers by other company.