The Treatment of Minority Shareholders - Assignment Example

Corporate Law Table of Contents Introduction 2 A Brief Analysis of the Scenario 3 A Brief Overview of the Remedies 6 Conclusion 10 References 11 Introduction The term, ‘minority shareholders’ is often referred to those shareholders who possess marginal stakes in a particular business company, owning generally less than 50% of the total equity shares, where more than 50% shares are acquired by ‘majority shareholders’. The minority shareholders of a business firm are also considered as the equity holders who do not possess the voting rights as well as market exit options. Moreover, the minority shareholders do not bear any controlling interest upon a company. The minority shareholders possess several rights which might be available under any ‘state close corporation laws’. The rights include voting during the election of the directors, amending corporate bylaws as well as articles of incorporation and participating in annual meetings associated with the stockholders. Besides, the other fundamental rights of the minority shareholders include voting on a few selected corporate events which include liquidation of the business entity, mergers or sale of assets, calling special meetings of the stockholders and scrutinizing the books, records as well as the lists of the shareholders. It is in this context that with the majority shareholders holding a strong position in a company, in frequent instances, disagreements between the majority and the minority shareholders have been identified in the modern business context. The disagreements have been mostly regarding the exclusion of the minority shareholders from management participation, disproportionate allocation of shares and withholding of dividends with profits among others (1). In this discussion, a detailed analysis of the problems concerned with the rights held by minority shareholders, playing vital role causing potential disagreements amid the members of both majority as well as minority shareholders, will be taken into concern. Moreover, the different statutory remedies which are available to the minority shareholders in order to deal with situations where the majority shareholders misuse their power or breach their duties will also be portrayed in the discussion. A Brief Analysis of the Scenario The minority shareholders are often acknowledged as institutional investors among different business entities who play a limited function in influencing the background of corporate governance construction. This is majorly due to the fact that the presence of the majority shareholders within a business firm owing the rights to partially control its decision making process often facilitates significant sources of conflicts affecting the interests of the minority shareholders (2). However, it is worth mentioning in this regard that the minority shareholders posses certain rights which may be accessible in accordance to any ‘state close corporation laws’. These rights generally include amending corporate by-laws, voting during the election of the directors and organizing as well as managing annual meetings related with the shareholders among others as mentioned in the articles of association and memorandum. Despite, it has often been observed that the minority shareholders or the institutional investors find it to be quite challenging to exercise the aforementioned rights in a smooth way witnessing minimum disruptions. This is simply because the majority shareholders tend to dominantly control the business operations as they bear large proportion or percentage of shares along with various decision making rights concerning the corporate governance structure of the particular entity. As the majority shareholders possess maximum quantity of shares (i.e. more than 50% of the total equity shares), it has been viewed that the interests of minority shareholders are being oppressed by several means. In this similar context, the different ways which contribute towards the oppression of the minority shareholders include exclusion from management participation, inappropriate issue of shares, deciphering harsh or ignorant behavior to their requests or rather suggestions at the board meetings, refutation towards accessing valuable information and mistreatment of the company funds which directly or indirectly tend to hamper their benefits (3). In relation to discussing the capability of the minority shareholders in order to enjoy their rights rewarded by their ownership of equity shares, the case which dealt with ‘Foss v Harbottle’ can be regarded as worth mentioning. This particular case engaged two minority shareholders who undertook legislative steps against the directors of the organization claiming that the assets of the organization had been misallocated by the majority shareholders, i.e. the directors and thus seeking high compensation for losses. In relation to this claimant, according to ‘Corporation Act 2001’, the court instigated two significant rules which deliberately barred the minority shareholders from initiating the proceedings. In this regard, the first rule which was instigated by the court concerned with the criteria of ‘proper plaintiff’ which deliberates that only the company can conduct necessary proceedings against the board members or the directors for their suspected misdoings. The other rule which was established during this case, concerned with the operations of ‘internal management’ which advocated that the court could not interfere if the suspected misdoings of the directors are sustained by the majority shareholders. The court, in relation to this case, recognized that the majority shareholders enjoy a certain extent of liberty in imposing barriers for minority shareholders concerning their rights (4). A similar perspective can be obtained with reference to the case example of ‘Gambotto v WCP Ltd’ which is linked with the deliverance of adequate information to the minority shareholders preserving fairness by the majority shareholders of a particular entity. The case revealed that the procedure of expropriation of shares should be fair as well as be valued independently. Moreover, the case also affirmed that the amount which would be paid to both the minority as well as the majority shareholders must take into concern the factors of standard allocation of dividends, market value, and nature of the business corporation along with its future. In response to this particular case, the court proceeded with the decision that the legal proceedings would be valid only if the majority shareholders can prove that fairness has been maintained in all circumstances concerning the rights held by the minority shareholders as per the company articles. However, the decision which was undertaken by the court ultimately created vital obstacles for the majority shareholders in imposing their dominant influence over the organizational policies and specifications, developing a stronger position for the minority shareholders (5). A Brief Overview of the Remedies Several remedies can be identified, which are readily accessible to the minority shareholders, for the purpose of dealing with situations where the majority shareholders are observed or suspected to misuse their absolute power or rather breach their duties by a certain extent. It is in this context that the enforcement of numerous statutory rights which tend to offer legislative solutions to the minority shareholders have often been identified to be implemented by various nations providing much relief to the plaintiffs (6). For instance, in Australia, the two significant mechanisms which defend the rights as well as the interests associated with the minority shareholders against the misbehavior deciphered by the majority shareholders are ‘Part 2 F.1’ and ‘Part 2F.1A’ of the Corporations Act followed in Australia. The former mechanism i.e. ‘Part 2 F.1’ is primarily concerned with the statutory rights of the minority shareholders in which the business affairs of a particular business enterprise are performed unjustly detrimental or unfairly biased towards the interests of the majority shareholders in comparison to the interests of the minority shareholders. Similarly, the latter mechanism i.e. ‘Part 2F.1A’ facilitates the aggrieved or oppressed minority shareholders to uphold lawful proceedings against the immoral behaviors deciphered by the majority shareholders towards them (3). Moreover, performing derivative actions can also be regarded as a noteworthy and beneficial remedy offered in the hands of the distressed minority shareholders. Contextually, the idea of derivative action can be elaborated as a deliberate action which is commenced by the shareholders of a specific business enterprise when they strongly believe that the enterprise is not sufficiently defending their rights preserving adequate fairness and integrity. In relation to this remedy of derivative action, the oppressed minority shareholders can perform enforce legal actions against the majority shareholders for their deciphered immoral behavior or misconduct, misuse of power, fraudulence, disregard and breach of duty (7). This statutory derivative action which falls under Section 236 of the Corporations Act has proven to be a thriving initiative in both federal as well as state courts being periodically pleaded by the distressed minority shareholders who experience significant disputes with the interests of majority shareholders (8). The other important remedies which are generally accessible to the aggrieved minority shareholders can be identified in terms of the oppression laws. This remedy which falls under Section 233 of the Corporations Act in Australia tends to support the minority shareholders in defending their rights as well as offer the oppressed minority shareholders with an enforceable legal order against the misconduct believed to be performed by the majority shareholders towards them. The various functions of oppression law include alterations in the working guidelines of a business corporation, wind-up orders and injunctions as well (9). Apart from the aforesaid remedies, there also lie certain other significant solutions for the aggrieved minority shareholders in order to cope up with the circumstances where the majority shareholders belonging to any corporation are examined or suspected to abuse their powers as well as violate their duties of fairness and integrity. These remedies majorly include increased right of the shareholders in accessing valuable information, minority buyout human rights and the prohibition of disproportionate rights from the company articles (10). For instance, in Australia, the shareholders’ rights in accessing required information under the Corporations 2001 Act, deliberates that the shareholders possess the right to disclosure as well as to scrutinize the records belonging to any specific business corporation. These particular rights are often regarded to be quite beneficial, especially for the minority shareholders when accessing valuable information and inspecting the records, proving as one of the imperative remedial measures to deal with the situations where the majority shareholders are accused to abuse their absolute power. Stating precisely, under the Corporations Act 2001, a shareholder can provide the business corporation with a relevant written notice affirming the suspicion and requesting for inspecting its financial records. The records may include the minutes of every conducted meeting, certificates of the directors, original copies of every report based on written communication conducted involving the shareholders and the interests registered by the corporation. In relation to ‘minority buy-out rights’, the Corporations 2001 Act apparently realized that it shall not be quite fair to force only the minority shareholders to oblige the willpower of the majority shareholders. In accordance with the Corporations Act 2001, the shareholders who vote against any fundamental matters of a business enterprise may include amalgamations and chief business transactions possibly essentializing the enterprise to buy their shares. Finally, another significant remedy for the minority shareholders in order to deal with the problems arising from the majority shareholders is the exclusion of unequal rights. The unequal rights can be measured in terms of withholding dividends along with profits and voting rights among others which has been formulated under the provision of the Corporations Act 2001. This prohibition of the uneven rights is quite likely to support the minority shareholders in availing fair as well as attractive dividends along with profits and other significant emolument(8). Thus, it can be stated that the aforesaid remedies will certainly help the minority shareholders to deal with the situations where the majority shareholders belonging to a particular business enterprise or corporation are suspected to abuse their power performing breach their duties by a certain extent. Conclusion After acquiring considerable idea about the nature of the majority shareholders, it can be stated that the majority shareholders play a dominant role over the minority shareholders in respect to the organizational decision making as they possess higher controlling power owing a significant amount of shares which generally accounts for more than 50% of the total equity shares. Consequently, there lay the major issue of potential disagreements between the members of both the groups i.e. the majority and the minority shareholders. It is in this context that the minority shareholders were also observed to be deprived from several grounds by the majority shareholders that majorly included prohibition from management participation and disproportionate share allocations among others. In order to deal with these sorts of issues or rather conflicts, certain remedies have been suggested by legal codes in various countries. The remedies comprise oppressing laws and statutory based derivative actions along with other beneficial strategies which fundamentally focus on securing the interests of the majority shareholders. References AbdulJaami, S. H., No Date. The Minority Shareholder. Treatment of Minority Shareholders. [Online] Available at: http://www.shajlaw.com/media/reports/TreatmentofMinorityShareholders.pdf [Accessed September 03, 2012]. Cassidy, J., 2010. Corporations Law: Text and Essential Cases. Federation Press. De Comarmond & Koeing, 2001. Shareholders’ Rights and Powers. Files. [Online] Available at: http://www.ckmauritius.com/Files/Doc/03-Newsletter-Shareholders%27%20Rights%20and%20Remedies%20No.%203.pdf [Accessed September 03, 2012]. Farrar, J. H. & Boulle, L., 2001. Minority Shareholder Remedies - Shifting Dispute Resolution Paradigms. Bond Law Review, Vol. 13, Iss. 2, pp.1-32. Hamdani, A. & Yafeh, Y., 2010. Abstract. 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