Minority shareholders have certain rights that should be protected, respected and upheld. Failure to understand and uphold these rights can cause permanent harm to your company, especially if there is irreparable damage to the relationship between the majority and minority shareholders.
If you have minority shareholders in your business, it is vital that you know and understand how their rights can be protected. In this way, conflicts and disputes can be avoided, which will in turn help to ensure that your business is successful.
Who are the Minority Shareholders?
By definition, minority shareholders are shareholders who own fewer shares than those of majority shareholders.
Rights of the Minority Shareholders
Regardless of the size of their stake, shareholders have the right to bring a claim for unfair prejudice or a statutory derivative claim. This means this right extends to minority shareholders.
Under this right, the shareholders can apply to a court for relief if they think business matters are being conducted in a way that could be harmful to the company. The same principle applies when company directors commit a breach of trust or are found to be negligent.
Besides the statutory rights, there are minority shareholder rights that are generally included in the articles of association. However, the best way to ensure all parties understand them is to create your own rights and incorporate them into your shareholders’ agreement. Here are the most common:
- Tag-along rights allow minority shareholders to force shareholders who want to sell their shares to make an offer for their shares under the same terms.
- Pre-emption rights are also known as the rights of first refusal and they are applicable when new shares are issued or transferred.
- Director/observer rights allow minority shareholders to appoint someone to represent them at board meetings, either as a director or an observer.
- Minority consent rights enable minority shareholders to veto certain actions of the board of directors/company.
How Can You Protect Your Rights as a Minority Shareholder?
Whether you own a majority of the company or are a minority shareholder yourself, there are many ways in which you can protect and uphold minority shareholder rights.
1. Ensure that the company has a shareholders’ agreement
As illustrated earlier, certain terms and provisions designed to protect the rights of minority shareholders can be included in a shareholders’ agreement. This is why your company must have a shareholders’ agreement that has been signed by both the majority and minority shareholders. Not only can this protect the rights of all shareholders, but it can also prevent disputes and ensure that the company is managed properly.
For instance, let us say there are four shareholders in your company (two majority with 35% ownership each and two minority with 15% ownership each), and you want to set up rules on how a proposal is to be approved. In your shareholders’ agreement, it can be written that 80% of the shareholders should vote in favour of the proposal for it to obtain approval. This means the two majority shareholders should get at least one minority shareholder to vote for the proposal.
2. Ensure that there is a fair valuation of shares
A fair valuation of shares is necessary when it comes to the sale and transfer of stocks. It will help reduce any resentment and prevent disputes, especially in private and family-run businesses. For this reason, you must ensure that there is a fair valuation of shares in your company, especially if you have plans to sell your shares at a later date. In addition, don’t forget to specify the valuation method in the shareholders’ agreement as this will ensure that your rights will be protected when you are ready to sell.
3. Consult legal experts
When in doubt, remember to consult a legal expert so your questions will be answered properly. Moreover, you should also seek professional legal assistance if you think you are being treated unfairly as a minority shareholder. This way, you will know exactly what to do to resolve the issue and uphold your rights.
Minority shareholders have rights and privileges that should be upheld and protected. Knowing and understanding these rights is essential to the success of your business as you will then be able to prevent any disputes or disagreements. Moreover, this knowledge can help you and the majority shareholders avoid doing something unwittingly that could cause harm to the minority shareholders.
Do you need any assistance drafting a shareholders’ agreement that will help protect both your minority and majority shareholders? Speak to BEB today. We can draw up an agreement tailored to your exact requirements.