Minority shareholder: status, rights, protection of interests

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

Minority shareholder is the owner of a non-controlling stake in the company's authorized capital. It can be represented by a legal entity or by one person. A non-controlling stake does not give its owner the opportunity to participate in the management of the organization, for example, to elect members of the Board of Directors.

Position of a minority shareholder in JSC

Since a shareholder with a small block of shares cannot be a full participant in corporate governance, his interaction with the majority shareholders is difficult. Owners of controlling stakes can reduce the value of minority shareholders' securities by transferring assets to a third-party organization with which small shareholders are not connected in any way. To prevent such situations and to improve relations between shareholders in general, in civilized countries, the rights of holders of non-controlling stakes are established by law.

Global practice of protecting minority shareholders

The legislation of developed countries provides for the protection of minority shareholders from the forced sale of securities to owners of large stakes at a lowervalue in case the latter decide to buy all the shares. In most cases, the protection of small shareholders is to limit the ability of the majority shareholders and the Board of Directors to abuse their power. All norms established by laws are intended to expand the powers of minority shareholders and involve them in the management process.

Often the law gives minority shareholders so much power that they resort to corporate blackmail to buy back their shares at inflated prices through threats of litigation.

Rights of minority shareholders in Russia

There are provisions in federal law that protect small shareholders. First of all, this protection implies the preservation of their independent, separate status in the event of a merger or acquisition. In the course of such processes, the minority shareholder may be the loser due to the relative reduction of its share in the new structure. This leads to a decrease in the level of its influence on the governing bodies.

The laws provide for the following measures:

1. A number of decisions require not 50%, but 75% of the votes of shareholders, and in some cases the threshold can be raised even higher. Such decisions include: amending the charter, reorganizing or closing the company, determining the volume and structure of a new issue, buying the company's own securities, approving a major property transaction, reducing the par value of shares with a corresponding reduction in the authorized capital, etc.
2. Council electionsdirectors must be held by cumulative voting. For example, if a minority shareholder owns 5% of the shares, he can elect 5% of the members of this body.
3. If the purchase of shares reaches 30, 50, 75 or 95% of all issued securities, the buyer must give the right to other owners of the company's securities to sell him their securities at or above the market price.
4. If a person owns 1% or more of the shares, he can sue on behalf of the company against management in the event of losses incurred by shareholders through the fault of the directors.
5. If a shareholder owns 25% of all securities or more, he must have access to accounting records and minutes drawn up at board meetings.

Conflicts between shareholders and their consequences

The stability of the company and the transparency of its actions have a positive effect on the stock price and attractiveness for investors. Numerous lawsuits and criminal cases against management personnel and shareholders, violation of laws by persons with certain powers within the company, has the opposite effect.

If a minority shareholder or group owns more than 25% of the stake and has interests that differ from the preferences of the majority, then making especially important decisions that require 75% or more is difficult.

Greenmail

The most common type of corporate conflict is called greenmail. This phenomenon is nothing but blackmail by a minority shareholder. It has many different manifestations and can seriously undermine stability.within the company.

Greenmail means that one minority shareholder or several minority shareholders, united in a group, begin to disrupt the adoption of all decisions that are important to the company. It also includes intentional actions that result in the company having to pay heavy fines. In addition, minority shareholders are able to collapse the value of shares using various methods available to them.

At the end of the day, greenmail comes down to one of two goals: promoting your own interests and gaining power over the company, or forcing the majority shareholders to buy back shares from small holders at an unreasonably high price.