Key Takeaways

  • Shareholder obligations can vary based on the type of shareholder (common vs. preferred) and their agreements.
  • Majority shareholders hold significant voting power and can influence major company decisions, such as mergers or selling substantial assets.
  • Shareholders, including majority holders, are typically not liable for a company's debts, but there are exceptions if corporate formalities are neglected.
  • Majority shareholders can influence board elections and are often involved in corporate decisions, as they control a large percentage of voting shares.
  • Courts can pierce the corporate veil in specific circumstances, holding shareholders liable for the company's actions if they neglect responsibilities.

Shareholder obligations vary depending on the type of business and shares involved, the shareholder's agreements, and the company's articles of incorporation. Even the type of shareholder makes a difference.

However, because a shareholder holds important stakes in the company, there are some similarities of obligations:

  • If a shareholder violates or contributes to a violation of the law or articles of association, or causes the company, a third party, or another shareholder harm, they can be held liable for damages.
  • Shareholders are not required to attend general meetings, but if stipulated in the articles of association, they should alert the company if they will be doing so. Notice is also required if they obtain more shares that should be added to the shareholder register.
  • If a shareholder controls more than nine-tenths of the company's shares and votes, they can redeem the rest of the minority shares.

The main goal of corporate managers and directors is to build long-term shareholder wealth. The reason for this goal is to provide accountability to the managers. If these leaders were tasked with pursuing the interests of everyone in the company, no one's interests would be realized.

Personal Liability of Shareholders

Shareholders are generally not responsible for the corporation's debts and obligations, but in some cases, courts will pierce the corporate veil if a plaintiff sues the shareholder directly. The "alter ego theory" is invoked when arguing shareholders should be accountable for the corporation. For a plaintiff to successfully argue the alter ego theory, they must prove the corporation is essentially a shell and not a separate business entity from the shareholder. If the corporation is proven to be an alter ego of the shareholder, limited personal liability protections of the shareholder should be ignored.

To evaluate the plaintiff's allegations, courts will investigate the following:

  • Were business formalities, such as meeting minutes or organizational filings, maintained?
  • Were personal and business funds kept separate?
  • Does the corporation have liability protection in place or has it been capitalized?
  • Did shareholders neglect or disregard their responsibilities to the corporation?

Majority Shareholder Legal Obligations

  • Majority shareholders hold significant influence in a corporation. These individuals or entities own more than 50% of the company’s shares, thus controlling voting power and company decisions. Their primary legal obligations include ensuring corporate governance is followed and that financial actions align with the company's best interests.
  • They are responsible for major decisions such as:
    • Approving or denying mergers and acquisitions (M&A)
    • Declaring dividends and distributions
    • Amending corporate bylaws and articles of incorporation
    • Calling shareholder meetings and setting their agendas .
  • Despite their control, majority shareholders are typically shielded from the company’s debts. However, they must act in good faith, ensuring they don't abuse their power for personal gain. Failure to comply with these responsibilities could result in legal consequences, including potential shareholder derivative actions if they cause harm to the company or other shareholders.

Derivative Suits

Even if a shareholder is damaged by a wrong done to the corporation, they can't personally pursue litigation because the corporation is a separate entity. Should a shareholder feel their stock depreciated unfairly, they cannot take action for their own interests alone. To receive restitution, the shareholder must file a derivative lawsuit in the name of the company, which will allow all shareholders to be made whole if compensation is received for wrongdoing.

Even though the plaintiff shareholder will be representing the company's interests, they will need to name their company as the nominal defendant. Typically, derivative suits allege that directors, officers, or someone in control of the company has breached their fiduciary duties -- such as compensating themselves or others excessively -- thereby damaging the corporation.

Often, the corporation's regular counsel will represent both parties, the shareholder bringing the suit or the company, and those accused of looting it. This results in the defendant's attorney arguing against the corporation obtaining damages.

The choice to involve outside counsel for joint representation is left up to the corporation, not the court. However, even forcing the defendants to retain an independent legal counsel will not fix the issue. Since the independent counsel would still work for the corporation, which is controlled by the defendants, it would take orders from them, even if they weren't technically defending them. The result would be the same — the corporation's best interests would be ignored and legal counsel would still oppose the company.

To remedy this from happening, courts will sometimes allow the counsel who has been providing joint representation to continue representing the corporation, while the defendants are required to obtain outside counsel. However, even if two different counsels are used, the defendants still control the corporation, and by extension, its legal counsel. It's important for the corporation's lawyer to realize that a conflict of interest can arise if they direct their litigation to favor the defendants. It's easier for the attorney if there are disinterested directors and legal teams they can take direction from.

Rights and Privileges of Majority Shareholders

  • Majority shareholders, due to their control over voting shares, have specific rights and privileges that distinguish them from minority shareholders. These rights include:
    • The ability to elect and remove directors, which directly impacts the company's strategic direction.
    • The right to approve or deny substantial corporate transactions, such as the sale of major assets or mergers .
    • Control over company decisions during financial distress, like the dissolution of the company .
  • Additionally, they are often entitled to inspect company records and books, which provides transparency on corporate operations and financial health. These rights ensure that majority shareholders maintain a significant role in shaping the corporation's future.

Frequently Asked Questions

  1. What are the primary obligations of a majority shareholder?
    Majority shareholders have the responsibility to vote on significant company decisions, such as mergers, acquisitions, and changes to corporate governance documents. They must act in the company's best interest, adhering to fiduciary duties.
  2. Can a majority shareholder be personally liable for company debts?
    Majority shareholders are generally not liable for the company’s debts, except in cases where the corporate veil is pierced due to fraudulent actions or failure to follow corporate formalities.
  3. What rights do majority shareholders have?
    Majority shareholders can vote on key company decisions, elect the board of directors, approve mergers and acquisitions, and have access to corporate records and financial statements.
  4. Are majority shareholders required to attend shareholder meetings?
    While not always required, majority shareholders often participate in shareholder meetings, as their votes have significant influence over company decisions.
  5. What happens if a majority shareholder violates their legal obligations?
    If a majority shareholder breaches their fiduciary duties or violates legal obligations, they may face legal action, including derivative suits or challenges to their control over the company.

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