What Are The Rights of Minority Shareholders?

You might imagine that under commercial law the majority shareholder holds all the power and that what they say goes. This is true to an extent, however, minority shareholders do have rights and commercial law has clear guidelines as to how those rights must be honoured.

A minority shareholder is someone or an institution that holds less than 50% of the shares of a company. In normal circumstances, this means that, regardless of the views, opinions or wishes of minority shareholders, if the majority who hold over 50% individually or collectively, take the opposite view, then the majority’s view will prevail.

Whilst it is always advisable that you speak to a professional financial advisor before entering into an arrangment like this, it is a simple principle to understand and is nothing sinister, as in many walks of life the majority view prevails. In all kinds of organisations, including governments,  50% +1 is enough to carry any vote. Within companies, this is the same, but that does not mean minority shareholders do not have rights and obligations akin to those of majority shareholders, as we will now explain.

Minority Shareholders Rights

Many of the rights that majority shareholders have also belong to minority shareholders. The fact that someone has a 10% share in the company versus someone with a 55% share, might mean that they do not always win votes when they are taken, but it still affords equal rights in many aspects of how a company operates.

For a start, they are entitled to attend meetings and to vote at those meetings. If they are unable to attend a particular meeting, they have the right to appoint a proxy to vote on their behalf. Before each meeting minority shareholders are entitled to not only receive notice that the meeting is being held but to also receive copies of all documentation relevant to the meeting.

It should be noted that under commercial law, these rights for minority shareholders cannot be ignored regardless of the size of their shareholding. As such, even someone with a 1% shareholding, is entitled to all of the above shareholder rights.

Does Company Size Make A Difference?

As far as commercial law is concerned shareholder’s rights exist whether they own shares in a multi-million dollar corporation or a small company. It is often assumed that the reason minority shareholders’ rights are in place is to protect them within larger corporations but, in practice, it is within smaller companies where their rights are most often at risk.

An example might be a small business where 51% of the shares are owned by one family and 49% of the shares by another. If the families have a falling out, the one with the majority shareholding cannot exclude the other family from the company as they have minority shareholder rights. This kind of personal clash between two families is not something that happens often within larger corporations as they usually have hundreds, if not thousands of shareholders.

Regardless of the company’s size, the Corporations Act makes it clear all shareholders have an obligation to conduct the affairs of the company ethically and responsibly and that if they fail to do so, regardless of their reasons, they could face civil or even criminal penalties.

Inappropriate Action By Majority Shareholders

If majority shareholders act in a way that denies minority shareholders rights, intimidates a minority shareholder, or unfairly disadvantages the minority shareholder financially, they are contravening the Corporations Act. Examples of contraventions include:

  • Denying Access To Company Records
  • Abuse Of Voting Power
  • Intimidating Behaviour During Board Meetings
  • Misappreciations Of Company Funds
  • Inappropriate Action To Remove Or Appoint Directors
  • Using Company Funds To Make Bogus Investments
  • Excluding Minority Shareholders From Company Meetings
  • Inappropriately Using Voting Power To Favour Third Parties

Any minority shareholder who experiences any of these actions should contact a commercial lawyer for further advice on how to proceed.