Balancing Majority and Minority Shareholder Rights

| Feb 27, 2020 | Firm News |

The health of a company can be jeopardized due to litigation between majority and minority shareholders. The shareholders holding most shares in the corporation are called majority shareholders while minority shareholders own less than 50 percent of the company’s outstanding shares. Since the majority exercise greater control over the company, minority shareholders often feel underrepresented and fear the majority will abuse their power to expropriate minority shareholders’ rights.

In privately held companies, minority shareholders are more prone to abusive practices as they lack protections provided by the publicly traded companies. Publicly traded companies’ stock prices are readily valued and sold on the public exchange. Private company minority shareholders may lack the ability to sell their interests quickly to protect their investments when the majority takes control or tries to violate minority shareholder rights. For the welfare of a company, it is advisable to balance the shareholder rights of majority and minority shareholders to avoid litigation due to exploitation of minority shareholders.

Common Minority Shareholder Rights

All shareholders have certain rights pertaining to the corporation.  The following general rights are afforded to all shareholders, including the minority:

  • A right to vote in annual shareholder meetings
  • To review and inspect company books and records
  • To a list of all shareholders
  • A right to vote on important corporate matters, such as selection of directors, approval of mergers, dissolutions, and on amendments to corporate charter documents
  • A right to buy company shares at a discount when the company is undergoing valuation for sale or transfer of ownership
  • Minority shareholders are also entitled to dividends and profit sharing

Negotiate Additional Rights

Private corporations can also provide additional minority shareholder rights to protect them from exploitation. These rights can be incorporated into the shareholder agreements. To ensure that minority rights are protected,  require the right to set minority shares at fair value that are fixed by auditors in the shareholder agreement. Such a practice will prevent abuse by the majority by setting a fair value of the minority shares fixed by a neutral third party. A distressed minority shareholder can then exercise the sale of their shares at a fair price.

Fiduciary Duties of the Majority

Majority shareholders have a duty to act as a fiduciary to the minority, which requires them to act in good faith toward the minority with honesty, loyalty, and fairness. They are also expected to act in the best interests of the corporation and not in their own self-interest.

When majority shareholders acquire another company to compete directly with the corporation, sell company stock to benefit for themselves, or pay out high salaries unfairly, they will have breached their fiduciary duties.  When an officer, director, employee, or shareholder engages in self-dealing, a derivative action may be initiated to protect the corporation. By protecting minority rights, companies can focus on achieving business goals, growth, and profitability.

Philadelphia Business Lawyers at the Harty Law Group Help Clients with Shareholder Agreements

At the Harty Law Group, Our Philadelphia business lawyers can negotiate shareholder agreements that focus on your company’s specific needs. Additionally, if shareholder rights have been violated, our attorneys can provide seasoned legal representation to protect your financial interests.

For an initial consultation today, call us at 267-383-3899 or contact us online. Located in Philadelphia and Haddonfield, New Jersey, we serve clients throughout Pennsylvania and New Jersey.