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The main goal of a shareholder is to gain profit

2459 words (10 pages) Essay in Free Law Essays

02/02/18 Free Law Essays Reference this

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The main goal of a shareholder is to gain profit


Shareholders are the proprietors of the company. The word shareholder means who have owned share of a particular company and gain certain rights and liabilities over that company. Generally the main goal of a shareholder is to gain profit because business people are interested in one thing: money, and will do anything that has to be done to make money.

Company is a form of business organization and is the larger version of organization compare to a Partnership business and a Sole-trader business. And it is also different for the fact that it has a separate legal entity that is a company will be considered as a citizen of the nation. It is also different from the two other forms of business in a way that the owners of the company bears a limited liability up to the amount they have invested or guaranteed unlike for the other two types that the owners bears unlimited liability. Unlimited liability is that the creditors of the business can claim beyond the assets of the business for the repayment of their debt.

There are two types of limited company:

Private limited company

Public limited company

Private limited companies can have a maximum of 50 shareholders and a minimum of two usually the shares are allotted among family members but they are not allowed to trade shares in the stock market or in other words they are not allowed to trade shares in public. On the other hand public limited companies have no limit on the maximum number of shareholders but there must be a minimum of two shareholders and they are allowed to trade their shares in the stock market.

Since they can raise funds from the general public they have easy access to more funds as a result it becomes easier for them to expand their operation but again it needs to be highly regulated as they are raising funds from general public.s in this topic we are taking into account public limited companies where the owners are the majority shareholders and the investors are minority shareholders. Both the shareholders are equally important.

Difference between majority and minority shareholders

Minority shareholders although are shareholders do not have input in the everday running of the business. The majority of shareholders run the bussinees while the minority receive dividends.. In an annual general meeting shareholders vote and elect a board of directors and they run the business.. It is seen that majority of shareholders are more powerful while the minority because of their low involvemnet tend to suffer a lot. In simple terms majority shareholders are those who own 50 % or more shares of the company and are the founding members. minority shareholders are those who own less than 50 % of shares, they are not the founding members of the company but invest by buying shares with the hope of earning a profit

Rights of majority and minority shareholders.

The basic right of any sharholder is the right to vote for directors.. Its limitation is that once shareholders have put directors in office, unless they themselves become officers or directors, they have no real participation in the day to running of the business.

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Shareholders generally have the right to one vote per share and, but under limited circumstances, a majority of the shares can govern. basic right of them is to participate in the election of directors. But this is very limited in practice since the number of shares owned by a minority shareholder is generally not enought to carry the vote for even one director. But under the BCA, under certain circumstances, allows “cumulative voting.” That approach permits a shareholder to vote the number of shares he/she owns times the number of directors to be elected. Under certain circumstances, that can be mathematically calculated and shareholders owning less than a majority of shares can elect one or more directors. Because of cumulative voting, the more directors elected, the fewer number of shares a minority shareholder needs to elect a director. As a result the number of directors to be elected each year would thus become important. The use of a “staggered board” would limit these rights, as under that approach only a small portion of the directors would be elected per year .. cumulative voting is possible if it is granted in the corporation’s articles of incorporation.

Elected shareholders are expected to to their work with utmost sincerity and abide by the code of conduct. But it is seen that these shareholders carry out their activities that gives the the most benefit and they do not take into account the interests of the minority, and the minorities because of their small size cannot stand up and are deprived. Minority shareholders also can sue the shareholders if they find out any foul play is taking place. Shareholders have the right to look at the annual report of the organisation and other imporant issues.

Shareholders may have the right to maintain their percentage ownership of stock in the corporation. however these rights may depend on the amount of shares they have. The BCA states that a shareholder will have preemptive rights under certain circumstances . they are rights to maintain his/her respective percentage interest if additional shares are sold. These are done by allowing the shareholder to purchase the number of shares necessary to retain that percentage interest. But in the case of cumulative voting, the BCA only recognizes preemptive rights forcorporations organized. Shareholders have the right for the dissolution of the corporation if they can smell any foul play. It is seen that the majority shareholders often mismanage the corporations money, use it personally etc.As a result the company suffers and along with it suffers the minority shareholders.

Disputes between shareholders have been happening from a very long time. This happens between majority and minority shareholders. Some reasons are dispute are

Reasons of dispute and consequences

Disputes occur when directors do not what carry out their duties like they are assigned to do. Different minds perceive different things differently. 2+2= 4 . but 3.5+0.5 is also 4. Different shareholders may think a particular company strategy may be good or a diffenent style of management. There can be dispute over separate business interests, dividend policies, exclusion of members from meetings, not others o participate etc. sometimes majority shareholders empowere them and take courses of action that that maximizes their own interests rather that the company.

In the case of unfair prejudice, court (under s. 994 Companies Act 2006 s.459) can take action, regarding disputes between shareholders. the court will order the purchase of the minority shares at a “fair value. This is done by valuation either by the other shareholders or by the company itself. the court has the power to wind up the company. Partneship of the company will also be dissolved. After the payment of liabilities from the partnership assets, the remaining assets may be distributed to each partner according to his interest of with any partnership agreements. . In the case of no agreements, the courts can step in to assess the value of each partner’s partnership share by applying the provision of the Partnership Act 1890.

Under s.260(3) of the Companies Act 2006, a derivative claim can be brought for the following causes of action against a director of the company, or a third party on the basis of negligence, default, breach of duty or breach of trust.

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The Companies Act 2006 has put guidelines to prevent such problems. it emphasizes on common law directors’ duties on a statutory footing and introduced new duties. The new duties include the duty to promote the success of the company (s.172) and also the duty to avoid conflict of interest (s.175) and the duty not to accept benefits from third parties (s.176). A material breach is actionable as a derivative claim by a shareholder or a group of shareholders.

Why the rise of minority

Minority shareholders have largely increased drasticall over the last few decades. Few reasons of their rise and importance are-

1.      Deregulation: Economic growth has resulted in increased growth prospects, but and have made markets more competitive. So in order to survive companiesl need to invest continuously on a large scale.

2.      Disintermediation:business cannot rely on banks to provide them with loans for expansion.

3.      Institutionalization: the institutionalization of the capital markets has tremendously increased the power of the market..

4.      Globalization: globalisation have made it possible for the expansion of business world wide. More businesses more completion and greater the need for capital accumulation.

5.      Tax reforms: Tax reforms along with deregulation and competition have shifted the balance away from black money transactions. This results in the worst forms of misgovernance less attractive than in the past.


It is the duty of the corporate governance framework to make it a point that the interest of both majority and minority of shareholders are taken care of .The main challenges in ensuring equitable treatment of minority shareholders include:

1.      Ensuring that the Board keeps in mind a shareholders’ perspective while making decisions and ensuring minority shareholders’ interests are protected;

2.      Improvements to the corporate governance;

3.      Concerns of stakeholders at large vs shareholders of the Company;

4.      Improving communications and interactions between shareholders, members of the board and management;

These are some guidelines that have to be met.

       I.            Equitable Treatment.

1.      Same voting rights for shareholders within each class.

2.      authority to obtain information about voting g rights attached to all classes before share acquisition.

3.      Changes in voting rights subject to shareholder vote. 

4.      Vote by custodians or nominees in agreement with beneficial owner.   

5.      Annual General meeting processes and procedures to allow for equitable treatment.

6.       Avoidance of undue difficulties and expenses in relation to voting.

    II.            The right to seek information

1.      Right to know about the price sensitive information of the company,

2.      all shareholders treated equally not on the basis of their investment.

3.      Right to inspect the Register of Members, Directors, , Debenture Holders,

4.      Right to receive Notice of General Meetings (the AGM or the EGM).

5.      Rights to receive annual report and audited accounts.

6.      Right to receive quarterly and annual accounts.

7.      Right to inspect the Minutes of General Meetings.

8.      Right to be kept fully informed of what is happening in the company.

 III.            The right to voice opinion

1.      Right to attend general meetings.

2.      Right to requisition for a general meeting.

3.      Right to get the court to direct the company to call a general meeting.

4.      Right to appoint proxies to attend and vote at a general meeting.

5.      Right to be heard and make proposals at shareholders’ meeting.

6.      Right to vote and elect directors and fix their remuneration.

7.      Right to nominate director.

8.      Right to appoint auditors and fix their remuneration.

9.      Right to receive dividends, if declared.

  IV.            Disclosure and Transparency

1.      Disclosure of material information

2.      Financial and operating results 

3.      Company objectives  

4.      Major share ownership and voting rights 

5.      Board members, key executives and their remuneration 

6.      Material foreseeable risk factors  

7.      Material issues regarding employees and other stakeholders  

8.       Governance structures and policies   

     V.            The right to seek redress

1.      Common law derivative action

2.      Redress mechanism under the Companies Act

3.      Redress mechanism under the Securities Laws

When any of these requirements are not met the minority shareholders sue the majorities.it is often seen that all these guide lines are not met and the minorities suffer a lot.

Manipulation of the minorities

Majority shareholders are shareholders who basically own more than 50 percent share and run the daily affairs of the company. They take all the risks and run the business. It is normally seen that majority shareholders are the company founders. In order to maximize their own benefits the often deceive the minority share holders. Sometimes the spread false rumours about new shares. People buy them and late see the price of them falling. This is when stock market crashes.stock market crashes are not at all good for business. People loose their homes, money and are generally bankrupt. This demotivates them and it is unlikely of them to invest in future. This is extremely bad for the economy. Shareholders are generally termed as profit maximizers. These shareholders deceive the minorities of their right but keeps in the public eye by sponsoring events and other charities. minorities also suffer in the case of demergers and buy outs

Why the need for balance.

For the smooth functioning of the company there need to be a proper balance among both the shareholders. Minority shareholders are as much importance as the majority shareholders.. both are important and is crucial for the company. The majority shareholers need the minorities as they need huge capital without the minority it would not been possible for companies to accumulate huge amounts of capital, expand business and improve the standard of living of the country as a whole. Countries are termed good or bad by their work in the business sector. When minority shareholders take actions many companies are shut down, partnerships are dissolve and the economy collapses to a certain extent. Many people loose their jobs and crisis occurs. At the same time if minorities did not invest companies would not have expanded like it has at present times. We would have been in a backward state and not been able to compete with any countries. So we see that the best interest of both parties should be met and this would lead to more success. Like i said, dissolving companies may benefit those who suffer but for the nation it would be disastorous since business greatly affects the economic conditions of the country. Different minds provide different ideas and the sum or best of ideas can provide astonishing results. This may be very good for a business. This would result in more products, services, more attached to people, more oppurtunities etc

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