Meaning of ‘Minority Shareholder’:
Minority shareholders are the equity holders of a firm who does not enjoy the voting power of the firm by the virtue of his or her below 50% ownership of the firm’s equity capital.
Fiduciary Duty Owed by Majority Shareholders: The majority shareholders owe a fiduciary duty to the minority shareholders. This means that majority shareholders must deal with minority shareholders with candor, honesty, good faith, loyalty, and fairness. Minority shareholders have the right to expect company officers and directors to act in the company’s best interests and in compliance with the shareholders agreement.
Ways that majority shareholders can breach this fiduciary duty
i. form other companies to compete directly with the corporation,
ii. Pay themselves high salaries, or
iii. Sell stock of the company on terms favorable only to themselves
♦ STATUTORY CLAIMS:
Shareholders may also be entitled to bring a claim for unfair prejudice, or a statutory derivative claim, purely by virtue of being a shareholder, and irrespective of the size of their stake.
♦ Meaning of Unfair Prejudice:
Where the affairs of a company are being conducted in a manner that is unfairly prejudicial to a shareholder’s interests, or an actual or proposed act or omission of the company would be prejudicial, any shareholder can apply to court for relief.
If both prejudice and unfairness is evidenced, the court has a wide range of powers with respect protection of interest of the minority shareholders which include:
Ways to Protect the interest of minority Shareholders:
Many provisions of Companies Act, 2013 deals with the situations where minority shareholders rights have been protected and the same can be divided into various major heads. The ways to protect the rights of minority shareholders are discussed below.
1. Use of winding up action to protect minority shareholder:
This is obviously the most serious route and so very strict guidance applies. A minority shareholder can petition the court to wind up the company if it is “just and equitable” to do this. It is generally unlikely this will be in the interests of any shareholder for various reasons, including the time it will take, the cost implications for the process and that the company debts require repayment as soon as the process begins. The shareholder has to show that there is a tangible benefit to the winding up order and that there is no other alternative.
2. Protecting minority shareholders under crowd funding
3. Resolving dispute over payment of dividends to minority shareholder
4. Review of Shareholder agreement for a minority shareholder:
5. Protecting minority shareholders under crowd funding:
6. Protection against dilution of shares of a minority shareholder:
Unless the articles of association of a company have dis-applied a shareholder’s right of first refusal (also known as a pre-emption right), any new shares that are being issued must first be offered to the existing shareholders in such proportions as to preserve their percentage shareholding in a company. This is to ensure that their investment is not diluted without first having the opportunity to invest further in a company to maintain their current shareholding.
♦ COURT ACTION
Can the Court Always Intervene?
A minority shareholder cannot ask the court to interfere with a decision made by the majority of the shareholders – this would be regarded as a decision of the company.
However, where the act has occurred through “negligence, default, breach of duty or breach of trust by a director of the company” then the minority shareholder can sometimes make the company take action against that director. These are known as “derivative actions” and are incredibly complicated scenarios where a shareholder with any level of holding requests the court to intervene either to: