Minority Shareholder: Everything You Need to Know
A minority shareholder is a shareholder who doesn't have control over a business, they hold large amount of stock in the company but have less than 51 percent.3 min read updated on January 01, 2024
A minority shareholder is a shareholder who doesn't have control over a business. They hold a large amount of stock in the company but have less than 51 percent. The term minority shareholder can apply to someone who owns a share, but can also apply to people and companies who have large stakes in a business. On the other hand, majority shareholders always have absolute control over the management, board of directors, and company.
Definition of Minority Shareholder
Many shareholders control companies when they own 30 percent, 15 percent, or less. The remaining shares are spread among a bigger number of shareholders, and each one has a small percentage that isn't able to gather shares. All shareholders, in this case, are considered minority shareholders, even if they could control a majority of the shares, they won't be able to get enough votes to take on the role of majority shareholders. If a dispute happens over the distribution or sale of assets or another issue happens that needs shareholder votes, there isn't enough voting strength to make a difference as a minority shareholder.
This type of relationship is normally established in a smaller business, where family or friends do the initial funding. A business owner will give a percentage of their ownership in exchange for the investment. The value of the investment grows as the company does, but the shareholders must protect their rights in the shareholder's agreement.
Problems Faced By the Minority Shareholders
Abuse of minority shareholders can happen when majority shareholders are greedy. They may think they have no limit and can take risks and do whatever they want since they don't get punished. This is why it's important to thoroughly examine the legal protection that minority shareholders have and how efficient it is. They need to have ethical protection and verify the law keeps them protected.
Foss vs Harbottle is a case where the basis of the law is related to how a shareholder can carry out procedures on the company's behalf. One of the principles of this rule is if a company has been wronged they can apply the proper plaintiff principle. A breach of duty is when a company has been wronged and the fix is with the company, not with each shareholder.
The second principle is that most of the will of the company's members should run the business, which is called the majority rule principle. If they don't want to take any action because it will cause the director who was wrong-doing to win, the minority shareholders need to prove the facts that show there should be an exception to this rule.
This law can prevent minority shareholders from bringing forward proceedings. There hasn't been a successful alternative procedure for this. Some common law jurisdictions have considered or introduced a statutory derivative action. The following are examples of wrongdoing to minority shareholders in companies that aren't ethical:
- Minority shareholders always lose in the end.
- Unethical managers find loopholes, work on the outskirts of the law, and hire only the best lawyers for advice in case there's wrongdoing.
- The Board of Directors often safeguards the controlling shareholders or majority interests who have remunerated and appointed them.
Independent directors aren't reliable to minority shareholders and often agree with the majority shareholders' opinions.
- Analysts, consultants, auditors, and investment bankers are mainly loyal to executives who pay them, so any minority shareholders should be careful with their recommendations and reports.
- When looking at the buy suggestions and reports of analysts for companies, it's important to know what the interests are of the analysts, what their success record is, and if they own any shares of the company.
- The legal system doesn't protect the rights of minority shareholders, and they can't fight equally against companies who have the best lawyers and more resources and time.
- Companies often cater to large institutions who were wronged by indirect compensation as minority shareholders. Society doesn't punish managers who are unethical and believe their ethics should be confined to the laws' observance.
These are all common problems that minority shareholders face that are frustrating and unfair to them.
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