A minority shareholder is the owner of a non-controlling interest in the authorized capital of the company. It can be represented by both a legal entity and one person. Non-controlling interest does not allow its owner to participate in the management of the organization, for example, to elect members of the Board of Directors.
Minority position in AO
Since a shareholder with a small block of shares cannot be a full participant in corporate governance, its interaction with majorities is difficult. Owners of controlling stakes may reduce the value of minority securities by transferring assets to a third-party organization with which small shareholders are not affiliated in any way. In order to prevent such situations and to establish relations between shareholders in general in civilized countries, the rights of holders of non-controlling packages are legally established.
World practice of protecting minority shareholders
The legislation of developed countries provides for the protection of minority shareholders from forcibly selling securities to holders of large packages at a lower cost in case the latter decide to buy all the shares. In most cases, the protection of small shareholders is to limit the ability of majorities and the Board of Directors to abuse their power. All norms established by laws are intended to expand the powers of minority shareholders and involve them in the management process.
Often the law grants minority shareholders so great rights that they begin to resort to corporate blackmail, requiring the repurchase of their shares at an inflated price through threats of litigation.
The rights of minority shareholders in Russia
Federal law contains rules protecting small shareholders. First of all, this protection implies maintaining an independent, separate status for them in the event of a merger or acquisition. During such processes, a minority shareholder may lose out due to a relative decrease in its share in the new structure. This leads to a decrease in its influence on the governing bodies.
The laws provide for such measures:
- A series of decisions require not 50%, but 75% of the votes of shareholders, and in some cases the threshold can be raised even higher. Such decisions include: amending the charter, reorganizing or closing the company, determining the volume and structure of the new issue, buying the company own securities, approving a major property transaction, reducing the face value of shares with a corresponding reduction in the authorized capital, etc.
- Elections to the board of directors should be held by cumulative voting. For example, if a minority shareholder owns 5% of the shares, he can elect 5% of the members of this body.
- If upon purchase of shares 30, 50, 75 or 95% of all issued securities are reached, the buyer must give the right to other owners of the securities of the company to sell him their securities at a market price or higher.
- If a person owns 1% of the shares or more, he may act in court on behalf of the company against the management in case of loss to shareholders through the fault of directors.
- If a shareholder has 25% of all securities or more, he must have access to accounting documents and minutes drawn up at board meetings.
Conflicts between shareholders and their consequences
The stability of the company and the transparency of its actions positively affect the stock price and attractiveness for investors. Numerous legal proceedings and criminal cases against management personnel and shareholders, violation of laws by persons who have a certain power within the company, has the opposite effect.
If a minority shareholder or group owns more than 25% of the stake and has interests that are different from the preferences of the majority, then it is difficult to make especially important decisions for which 75% or more are needed.
Greenmail
The most common form of corporate conflict is called greenmail. This phenomenon is nothing but blackmail by a minority shareholder. It has many different manifestations and can seriously undermine stability within the company.
Greenmail means that one minority shareholder or several minority shareholders, united in a group, begin to disrupt the adoption of all decisions that are important for the company. It also includes deliberate actions leading to the fact that the company has to pay heavy fines. In addition, minority shareholders are able to collapse the value of shares by various methods available to them.
Ultimately, the greenmail comes down to one of two goals: promoting one's own interests and gaining power over the company, or forcing majority shareholders to buy back shares from small holders at an unreasonably high price.