A minority shareholder in a corporation is a shareholder who owns less than 50% of the corporation’s shares, while a majority shareholder owns more than 50% of its shares. Since majority shareholders own the largest percentage of the shares, they have more voting power and control over the company’s affairs. This leaves minority shareholders with relatively little power.
However, minority shareholders have certain legal protections and majority owners need to understand these rights to avoid potential legal problems. We will cover these rights and how business owners can enforce and protect them at the Warren Law Group.
Who Is a Minority Shareholder?
Minority shareholders are any shareholders in a corporation who don’t own enough shares to control the business and make significant decisions. They hold less than 50% of the corporation’s shares but still have some essential rights.
Essential Minority Shareholder Rights
Majority shareholders owe minority shareholders a fiduciary duty to work in the best interest of the overall business and unfairly deny the minority to share in the economic benefits of the company. Minority shareholders may not have much voting power as to company decisions, but the law still provides certain rights. A few of the most critical minority shareholder rights include:
Right to Access Company Information
Minority shareholders have a right to access the company’s books and records, such as accounting ledgers and financial statements, for ‘proper purpose,’ which means a legitimate purpose to protect the company’s best interests.
Right to Participate in Major Business Decisions
Minority shareholders have a right to be notified of critical business decisions. Unless stated in the articles of incorporation, they have a right to vote for corporate officers and directors.
Right to Seek Legal Recourse
A minority shareholder has a right to seek legal remedy if majority shareholders violate their duties of acting in the best interest of the company.
How Business Owners Can Protect Minority Shareholder Rights
Business owners can protect minority shareholder rights through the following ways.
Contractual Protections Under the Shareholders Agreement
A Shareholders Agreement can be the best form of legal protection for minority shareholders in a corporation. This agreement protects minority shareholder rights through contractual rights beyond the ones provided by corporate and statutory laws by including specific contractual clauses.
Business owners should draft an agreement that allows minority shareholders to participate in significant decision-making through board representation. Other contractual protections under a Shareholder Agreement include protecting minority shareholders’ shares from dilution, providing minority shareholders with proper and fair distribution of profits, and providing minority shareholders with access to the company’s information through a right of inspection.
Weighted Voting Rights
Another option to safeguard minority shareholder rights is to draft weighted voting rights for specific issues where the minority shareholders’ vote has more weight than their percentage of shares. This ensures that majority shareholders cannot remove directors or officials appointed by minority shareholders.
Companies can protect minority shareholder rights by ensuring their Bylaws include specific reserved issues requiring approval from the supermajority of shareholders. In practical terms, a supermajority of the shareholders can be 75% or two-thirds of the shareholders.
This means that on some issues, the minority shareholders can have veto voting rights. For example, their right to veto can be on major decisions like changing the company’s Articles of Incorporation. It can also be based on changes in the share capital of the business and any significant change in the company’s nature of business.
Protecting the Company’s Interest as A whole
To protect minority shareholder rights, business owners should ensure majority voting rights don’t block the company’s right to a claim against a majority shareholder. They can do this by setting up committees that exclude any majority shareholders’ appointees responsible for such claims. In addition, they can ensure that majority shareholders or appointees will not vote on or interfere with such claims.
Learn More About Shareholder Rights from Warren Law Group
By protecting and enforcing minority shareholder rights, business owners adhere to corporate law that requires the company to act in the shareholders’ interest and benefit the company. At Warren Law Group, our legal experts can help your company with corporate governance and regulatory compliance, among other corporate issues. Contact us today for more information.