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Glossary

Minority shareholder: Explained

BY TIO Staff

|August 3, 2024

In the world of trading and investment, the term 'Minority shareholder' holds significant importance. This article aims to provide an in-depth understanding of the concept, its implications, rights, and the role it plays in the trading market. This comprehensive glossary entry will serve as a valuable resource for both novice and experienced traders.

Minority shareholders, as the name suggests, are those shareholders who own less than 50% of a company's shares. Despite their lesser stake, they play a crucial role in the company's operations and have certain rights that protect their interests. Let's delve deeper into the concept and its various aspects.

Understanding Minority Shareholders

Minority shareholders, also known as non-controlling shareholders, are investors who own a smaller portion of a company's outstanding shares and do not have the controlling interest in the company. They might not have the power to dictate the company's policies or decisions, but they do have a say in the company's affairs through their voting rights.

The percentage of ownership that qualifies an investor as a minority shareholder can vary. However, the most common threshold is 50%, meaning any shareholder who owns less than half of the company's total shares is considered a minority shareholder.

Role of Minority Shareholders

Minority shareholders play a crucial role in maintaining checks and balances within a company. They have the right to vote on major company decisions and can influence the direction of the company. Their involvement ensures that the controlling shareholders or the management cannot take decisions that might harm the minority shareholders' interests.

Moreover, minority shareholders also contribute to the company's capital. They provide funds that the company can use to grow and expand. In return, they get a share of the company's profits proportional to their shareholding.

Types of Minority Shareholders

Minority shareholders can be classified into two types based on their shareholding percentage: small minority shareholders and substantial minority shareholders. Small minority shareholders are those who own a very small percentage of the company's shares, often less than 1%. On the other hand, substantial minority shareholders are those who own a significant but non-controlling percentage of the company's shares, typically between 10% and 50%.

While both types of minority shareholders have voting rights, substantial minority shareholders often have more influence over the company's decisions due to their larger stake. They can also negotiate for additional rights, such as the right to appoint a director on the company's board.

Rights of Minority Shareholders

Despite holding a lesser stake in the company, minority shareholders are entitled to certain rights to protect their interests. These rights are usually defined in the company's bylaws or the corporate law of the country where the company is incorporated.

It's important to note that the specific rights of minority shareholders can vary from one jurisdiction to another. However, some common rights include the right to vote on major company decisions, the right to receive dividends, the right to access the company's books and records, and the right to sue the company for wrongful acts.

Right to Vote

One of the most important rights of minority shareholders is the right to vote. They can vote on major company decisions, such as the election of directors, mergers and acquisitions, and changes to the company's bylaws. This right ensures that the controlling shareholders cannot take major decisions without considering the views of the minority shareholders.

However, the influence of minority shareholders' votes largely depends on their shareholding percentage. The more shares they own, the more votes they have, and the greater their influence on the company's decisions.

Right to Receive Dividends

Minority shareholders have the right to receive dividends, which are a portion of the company's profits distributed to shareholders. The amount of dividends a minority shareholder receives is proportional to their shareholding.

However, the decision to distribute dividends and the amount of dividends is usually made by the company's board of directors. Therefore, minority shareholders do not have a direct say in this decision. But they can influence it through their voting rights.

Right to Access Company's Books and Records

Minority shareholders have the right to access the company's books and records. This right allows them to monitor the company's financial performance and ensure that the company is being managed properly.

However, this right is usually subject to certain conditions. For example, the minority shareholder might need to have a valid reason for requesting access to the company's records. Also, they might not be allowed to disclose the information obtained to third parties.

Right to Sue the Company

Minority shareholders have the right to sue the company for wrongful acts, such as fraud, breach of fiduciary duty, or violation of their rights. This right provides a legal remedy for minority shareholders if they believe their interests are being harmed by the company's actions.

However, suing the company is usually a last resort for minority shareholders. It can be a lengthy and costly process, and there is no guarantee of success. Therefore, minority shareholders usually try to resolve their issues through negotiation or mediation before resorting to legal action.

Challenges Faced by Minority Shareholders

While minority shareholders have certain rights to protect their interests, they also face several challenges. These challenges stem from their lack of control over the company and the potential for their interests to be overlooked or disregarded by the controlling shareholders or the management.

Some of the common challenges faced by minority shareholders include lack of influence over company decisions, risk of oppression by controlling shareholders, and difficulty in selling their shares. Let's explore these challenges in more detail.

Lack of Influence Over Company Decisions

One of the main challenges faced by minority shareholders is their lack of influence over company decisions. Even though they have voting rights, their votes might not be enough to sway the decision in their favor if the controlling shareholders or the management are against it.

This lack of influence can be particularly frustrating for minority shareholders when they disagree with the company's direction or policies. They might feel that their interests are not being considered or that their voice is not being heard.

Risk of Oppression by Controlling Shareholders

Minority shareholders face the risk of oppression by controlling shareholders. This can happen when the controlling shareholders use their power to make decisions that benefit them at the expense of the minority shareholders.

For example, the controlling shareholders might decide to pay themselves excessive salaries, depriving the company of profits that could have been distributed as dividends. Or they might engage in related-party transactions that are not in the best interest of the company.

Difficulty in Selling Shares

Minority shareholders might face difficulty in selling their shares, especially if the company is privately held. Unlike shares of publicly traded companies, which can be easily sold on the stock market, shares of private companies are not as liquid.

Moreover, there might be restrictions on the transfer of shares in the company's bylaws. For example, the controlling shareholders might have the right of first refusal, meaning they have the right to buy the shares before they can be sold to an outside party.

Protecting the Rights of Minority Shareholders

Given the challenges faced by minority shareholders, it's important to have measures in place to protect their rights. These measures can include legal protections, corporate governance practices, and shareholder agreements.

Let's explore these measures in more detail and understand how they can help protect the rights of minority shareholders.

Legal Protections

Legal protections for minority shareholders are usually provided by the corporate law of the country where the company is incorporated. These laws can include provisions to protect minority shareholders from oppression, fraud, and breach of fiduciary duty.

For example, the law might allow minority shareholders to sue the company or the controlling shareholders for wrongful acts. Or it might require the company to obtain the approval of a certain percentage of minority shareholders for major decisions, such as mergers and acquisitions.

Corporate Governance Practices

Good corporate governance practices can also help protect the rights of minority shareholders. These practices can include transparency in decision-making, fair treatment of all shareholders, and effective communication with shareholders.

For example, the company might have a policy of disclosing all major decisions to shareholders and providing them with detailed information to make informed decisions. Or it might have a board of directors with independent directors who can act as a check on the controlling shareholders.

Shareholder Agreements

Shareholder agreements can be a useful tool to protect the rights of minority shareholders. These are contracts between the shareholders that define their rights and obligations.

For example, the agreement might include provisions to protect minority shareholders from oppression, such as a requirement for unanimous approval for certain decisions. Or it might include a buy-sell agreement that provides a mechanism for minority shareholders to sell their shares.

Conclusion

In conclusion, minority shareholders play a crucial role in the trading market. Despite their lesser stake, they have certain rights that protect their interests and allow them to influence the company's decisions. However, they also face several challenges, such as lack of influence over company decisions, risk of oppression by controlling shareholders, and difficulty in selling their shares.

Therefore, it's important to have measures in place to protect the rights of minority shareholders. These can include legal protections, corporate governance practices, and shareholder agreements. By understanding these aspects, both minority and majority shareholders can ensure a fair and profitable trading environment.

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TIO Staff

Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.