Key Takeaways

  • A majority shareholder holds more than 50% of a company’s shares and often exercises substantial control over strategic decisions.
  • Their influence varies depending on whether the company is privately held or publicly traded.
  • Majority shareholders may also bear fiduciary duties to minority shareholders, particularly in closely held corporations.
  • Abuse of majority control can lead to legal challenges, including shareholder oppression claims.
  • They play a pivotal role in mergers, acquisitions, and corporate governance.
  • Institutional investors increasingly act as majority shareholders in public companies.
  • Legal protections for minority shareholders limit the majority's ability to act solely in their own interest.

A majority shareholder is an individual or company who owns more than 50 percent of a company's shares of stock. Shareholders own shares of stock in public or private limited companies but do not own the actual corporation. However, they are considered stakeholders since they contribute a financial investment to the corporation.

Characteristics of Majority Shareholders

The majority shareholder is sometimes called a controlling shareholder. It can be a person, company, or government. In many cases, the majority shareholder is the company's original owner or his or her ancestors. The majority shareholder's controlling interest means he or she has more voting power and can influence the company's strategic direction and operation. Some companies do not have a majority shareholder; this role is more common in privately held companies than in public ones.

The majority shareholder may be the chief executive officer (CEO) of the company. This individual sets strategic goals for the corporation and takes steps to ensure that they are met. In larger firms, corporations, mutual funds, banks, pension funds, and hedge funds often hold large blocks of shares. 

In many cases, CEOs and directors are paid all or part of their salary in stock options, so they may also hold large stock percentages. When stock is bought or sold by a corporate executive, this information must be made public and reported to the Securities and Exchange Commission using Form 10-Q.

Some majority shareholders do not participate in the everyday management of the company, while others are intimately involved in its inner workings. If a majority shareholder wants to reduce or completely sell his shares, he may choose to sell to competition or private equity firms to get the best price.

Corporate shareholders can vote in their own interest as long as they do not violate the fiduciary duty they owe to other shareholders. 

Legal and Ethical Responsibilities of Majority Shareholders

Majority shareholders have a fiduciary duty not to misuse their position of power, especially in closely held corporations where minority shareholders may lack a voice. Courts have recognized that majority owners must act in good faith and avoid actions that unfairly prejudice minority interests.

Common breaches of fiduciary duty include:

  • Withholding dividends while compensating themselves excessively
  • Diluting shares to reduce minority ownership
  • Denying access to company information or decision-making processes

When these actions occur, minority shareholders may pursue legal remedies under shareholder oppression laws or derivative lawsuits.

Influence of Majority Shareholders in Public vs. Private Companies

The role of a majority shareholder can differ significantly between private and public corporations. In privately held companies, the majority shareholder often has direct operational control and may even hold executive roles. Their decisions can substantially impact day-to-day business, strategic initiatives, and financial management.

In publicly traded corporations, majority control is rarer and often held by institutional investors such as hedge funds, pension funds, or large investment firms. These entities may not be involved in operations but can influence corporate policy through voting power and board appointments. In both cases, the presence of a majority shareholder may affect minority shareholders’ confidence and the overall governance structure.

Shareholder Rights

Some shareholders may have elevated privileges depending on the class of stock they hold. These may include:

  • Voting rights
  • Board of director election
  • The right to buy newly issued shares
  • The right to assets if the company is liquidated
  • The right to receive profit distributions

Most shareholders are in the secondary market, which means they purchase shares from other investors who have purchased them directly from the company in exchange for capital. Thus, shareholders typically do not actually own the corporation, have a right to claim its profits, or act as investors who contribute capital.

A company is considered a separate legal entity and is thus the sole owner of its assets. Shareholders do not have the right to use a company's assets, including but not limited to equipment, materials, and buildings. Even shareholders with a large ownership percentage do not have power in the corporation. However, in most cases, the board of directors and managers of the company are required to act in the best interests of the shareholders.

Shareholders do have a right to elect the board of directors. Typically, each has a vote weighted by the percentage of his or her share. If the shareholders are unhappy with the direction of the company, they can elect a new board of directors that will, in turn, appoint new managers. 

Shareholders are not responsible for a company's insolvency, and their personal assets are not at risk if the company has debts or financial obligations. However, shareholders do not receive dividends and other cash assets until liabilities have been settled.

Majority Shareholders and Corporate Governance

Majority shareholders often play a critical role in shaping corporate governance. Their voting power allows them to:

  • Appoint or remove board members
  • Approve major decisions like mergers or acquisitions
  • Influence executive compensation and company policy

While this authority can provide stability, it also places a responsibility on the majority shareholder to ensure decisions align with the company’s best interests and do not disproportionately benefit themselves at the expense of other shareholders.

Rights and Remedies for Minority Shareholders

To protect against abuse by a majority shareholder, minority shareholders are granted specific rights, including:

  • The right to inspect corporate records
  • The right to receive fair treatment in dividend distribution
  • Protections against dilution of their ownership
  • The right to sue for shareholder oppression or breach of fiduciary duty

Courts can impose remedies such as forced buyouts at fair market value, reversal of oppressive acts, or even corporate dissolution in extreme cases.

Types of Shareholders and Stock

Shareholders may own either common or preferred stock. Common stock has no fixed value. These stockholders are last in line to receive company assets and profits but may receive dividends with board of director approval. Preferred stockholders are first in line to receive profits and assets after creditors are paid.

Redeemable stock can be repurchased by the company in the future. Convertible stock consists of preferred shares that can be exchanged for common shares.

Shareholders are usually considered either individual or institutional investors. Individual investors purchase shares of the stock using their own money, while institutional investors are purchasing shares on behalf of others. The latter category includes banks, insurance companies, investment companies, and pension funds. 

Institutional Majority Shareholders

Institutional investors, such as mutual funds and private equity firms, frequently act as majority shareholders in public companies. Their approach tends to prioritize long-term value creation and risk management. These investors may advocate for strategic changes, improved ESG (Environmental, Social, and Governance) practices, or increased shareholder returns.

However, institutional majority shareholders must still comply with fiduciary responsibilities and may face scrutiny from regulators, boards, and other stakeholders to ensure their influence supports the broader shareholder base.

Frequently Asked Questions

1. What is a majority shareholder's role in decision-making? A majority shareholder can significantly influence or directly control key corporate decisions, especially in private companies, due to their voting power.

2. Can a majority shareholder be held legally accountable for mistreating minority shareholders? Yes. They can face lawsuits for shareholder oppression, breach of fiduciary duty, or unfair business practices.

3. Do majority shareholders always manage the company? Not necessarily. Some are passive investors, particularly institutional shareholders in public companies, while others actively manage the business.

4. What happens if a majority shareholder sells their stake? Selling a controlling stake can shift the company’s leadership and strategic direction, especially if acquired by a competitor or private equity firm.

5. How do courts protect minority shareholders? Courts can enforce fiduciary duties, provide financial remedies, or order buyouts to prevent or address majority abuse.

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