Shareholder Rights at a Glance
Shareholders of private companies are entitled to certain rights, and these rights may be generally governed by applicable corporate law and specific contractual terms that govern the relationship among shareholders and between shareholders and the corporation.
Voting Rights
As a matter of general corporate law, the rights of shareholders to vote at meetings of shareholders or solicit approval by written consent are subject to the terms of the governing corporate documents. These components include, without limitation, the articles of incorporation and bylaws of such corporation, the laws of the state of incorporation, the particular state in which the corporation is formed (if not the same as the state of incorporation) and, to the extent applicable, the laws of the state in which such corporation has its principal place of business . In most cases, the shareholders of a private company have more restricted voting rights than the shareholders of a public company, whose rights are governed by the federal securities laws, including the rules and regulations promulgated under those laws by the SEC. For example, shareholders of a private company may have voting rights with respect to any matter that requires the approval or ratification of the shareholders by applicable corporate laws or by the bylaws of the corporation.
Information Rights
As a general matter, the shareholders of a private company do not have the rights that shareholders of a public company have to receive periodic reports from the issuer of the securities they hold. Nevertheless, shareholders of a private company generally have the right to:
Dividends
Shareholders of a private company are also entitled to receive dividends if, as and when declared by the board of directors.
Who are Minor Shareholders?
When a private company registers shares, a registrar generally creates a register of the share ownership.
Should the private company have more than one shareholder with less than 5 percent of the ownership, such minority shareholders will enter into the register as minor shareholders. Although the actual shareholding might not seem significant, a shareholder even as little as 0.01 percent can enforce certain rights as envisaged in the Memorandum/Articles of Association, or any other agreements regulating the relationship between the minority shareholders and the company. In practice, however, most minor shareholders have very limited rights.
The major shareholder(s) in a company often hold the power of veto over certain decisions. However, the decisions of the minor shareholders in a company, where they hold less than 5 percent of the shares, are generally insignificant to the corporate affairs of the company.
Minor shareholders typically hold the following rights in a private company:
- The right to receive notice of a shareholders’ meeting and the relevant resolutions, as such notice has a required minimum time period before the date of the shareholders’ meeting.
- The right to attend a shareholders’ meeting.
- The right to receive dividends.
- The right to share in the distribution of the assets, if any, on the winding-up of the company.
- The right to vote against a resolution relating to conflict-of-interest transactions by major shareholders or for the removal of directors.
These rights may be extended in the Memorandum/Articles of Association or other contractual arrangements entered into between the shareholders.
Such rights are very limited and must be exercised within the specified time periods, failing which they will be deemed to have been waived.
Legal Rights of Minor Shareholders
An important legal issue for minority shareholders in private companies is whether they will be able to enforce their basic rights. The good news is that there are certain legislative frameworks designed to protect minority shareholder interests.
One of the key pieces of legislation for minority shareholder protection in Australia is the Corporations Act 2001 (Cth). This Act imposes various obligations on private companies (and public companies). Importantly, it allows shareholders to bring certain actions against the company and its directors.
Some provisions of the Corporations Act 2001 protect minority shareholders’ interests in private companies. For example: The Act also protects minority shareholders’ interests by restricting super-majority control by requiring a simple majority or special resolution. So, for example, if the others wish to pass an ordinary resolution which allows them to divest their shares at below market prices, and you voted against that motion, then the motion would be defeated.
The laws governing shareholders’ rights differ between jurisdictions. As discussed above, under Australian law there are statutory rights, which are designed to protect even the interests of minority shareholders.
Issues that Minor Shareholders Face
It is not hard to see how a minor shareholder can easily feel all but irrelevant in the grand scheme of a privately-held company. Whether you hold 1%, 10% or anything in-between, you may find yourself completely at the mercy of the larger shareholders when it comes to company decisions and a lack of access to information that the top shareholders have access to.
Obtaining information
When you are a minor shareholder, it can be difficult to obtain information on the direction the company is going and the general operations of the business. While the larger shareholders are privy to all of this information, minor shareholders can be left in the dark as to any new developments within the company. Being in the dark can lead to anxiety about your investment, causing you to want to find out more about your investment. But how do you do this?
Even if you are entitled to certain pieces of information under the provisions of your shareholders’ agreement, the problem remains that the information may be difficult to come by . This is a common problem for minority shareholders, and something that should be addressed by the company to prevent any disruption in business.
Lack of influence
The lack of influence has been addressed at the outset of this section. You may have a seat on the board of directors, but the risk is that it is only the larger shareholders who will have the votes to elect members of the board and any directors management seats. As such, without access to or strength in numbers, you may feel like your opinion and influence does not matter.
Taking solace
Having said all of this, there are legal remedies at your disposal. With the right legal team on your side, you can assert your rights as a minority shareholder. You can exercise rights to receive certain information or ask that you be included in particular shareholder or board meetings. If you do not have these rights, you may want to work with your lawyer to find out if you can pursue your interests through other means.
Because no two situations will present themselves in the same way, it’s important to speak to your attorney about the best strategy for you.
Making Minority Shareholder Rights Work for You
Nonetheless, there are avenues through which minor shareholders can influence significant matters or concerns within a private company in which they own shares. Shareholder Agreements: A seasoned business lawyer is likely to recommend entering into a shareholder’s agreement either prior to incorporation or shortly thereafter, if the company will have more than one shareholder. A shareholder agreement is a written contract amongst the shareholder(s) which can elaborate beyond the scope of the relevant corporate statutes in regulating rights and obligations of the shareholders as between themselves and/or the company. The extent to which a shareholder agreement is enforceable is largely contingent upon the written agreements of the shareholders in their incorporation documents and shareholder agreements, if any. Thus, reserving greater control over certain affairs of the company can be structured through shareholder agreements. In a shareholder agreement, the shareholders can set out how corporate decisions must be made, how profits are divided, what happens in the event that a shareholder wants to sell his/her shares, how a shareholder may voluntarily exit and how the company will be dissolved. Majority Vote Requirement: In relation to board decisions, under section 134(3) of the CBCA, a majority vote cast by the directors at a meeting, or written resolution signed by all of the directors entitles the directors in favour of such resolution to act on behalf of the corporation. In particular, the articles of a corporation can stipulate "super-majority" requirements (section 140(1.1) of the CBCA). If so stipulated, contingently upon the share proportions held by minority shareholders, such shareholders may either consent to or veto 100% of corporate decisions, depending on the super-majority requirement. A similar provision to majority votes, under both the OBCA and CBCA, is the "special resolution requirement" which requires a particular matter to be approved by no less than two thirds of the votes attached to the shares that are entitled to vote. This is another avenue to enhancing minority shareholder influence. Injunction: Moreover, under section 241 of the OBCA, the Ontario Superior Court of Justice may make an order restraining the company from acting or continuing to act in a manner that is oppressive or unfairly prejudicial to a shareholder or inter alia, in disregard of a shareholder’s interest. Remedies can be ordered in favour of the shareholder/petitioner who has brought the oppression action if it is found to be justified.
Examples and Case Studies
The following areas have been the subject of successful litigation by minority shareholders:
Intra-company tax planning: A shareholder’s right to know about a potential tax liability of the company can make a big difference. The company in the recent case BT Canada Trust Co. v. 1051936 Ontario Ltd. had entered into an aggressive tax plan with questionable benefits for the shareholders. The corporation was dissolved by tax authorities for failure to file tax returns. The minority shareholder had a buy-sell agreement that allowed him to purchase shares any time after the third anniversary of the date the company was incorporated. He purchased the shares shortly after dissolution, but the shares had no value at that time.
Fraudulent removal of a shareholder: There are many ways to expel minority shareholders from private companies. Such attempts can lead to expensive litigation , particularly when the expulsion is conducted in bad faith or on other fraudulent grounds, as in Gollner v. B.B. Kandel Electrical Inc., [2000] O.J. No. 2217 (Ontario Superior Court).
Related party transactions: Minority shareholders have been successful in obtaining shareholder remedies in situations where controlling shareholders breached both their fiduciary duty and the unfair prejudice standard through related party transactions (where a shareholder does or has something done for them, at the expense of the minority).
Fundamental changes to the capital structure of a corporation: Other successful cases involve minority shareholders who were unfairly prejudiced when a shareholder approved a change to the capital structure of a corporation.
Other changes in control and ownership: Shareholder oppression has been litigated successfully by minority shareholders for situations involving changes in share ownership and control by controlling parties.