Minority Shareholder

A minority shareholder is an individual or entity that owns a minority stake in a company, which means they possess less than 51% of public or private company shares.  The purpose of these shareholders is to provide capital to a company in exchange for a portion of ownership.

Minority shareholders have fewer voting rights, controlling options, and decision-making authority.  It simply means that a minority shareholder cannot argue or have multiple options to put forward if they don't like a business decision. These shareholders are also called non-controlling interests. Additionally, these shareholders play a vital role in contributing to the success and accountability of the company.

• Minority shareholders own less than 51% of public or private company shares.
• In addition, they do not share many rights and influence in the company's decision-making process.
• We can readily observe that majority shareholders abuse their power and attempt to remove minority shareholders, either by buying them or squeezing them out of force.
• These shareholders can take legal action to ensure their voices are heard if necessary. However, the company does have some fiduciary duties towards them.

Minority shareholders are the company members that own less than 50% of shares in the corporation. Irrespective of whether it is a private corporation or a publicly listed company, every company has its set of major and minority shareholders. Such shareholders have little control over a company's strategy-building and decision-making process. Therefore, they lay beneath the power and influence of majority shareholders.

The minority shareholders definition states that every company has an article of the corporation, a guiding document that narrates simple rights to such shareholders. For example, they possess audit rights and can investigate company reports and financial statements. However, many believe that since they do not know much about business, it is best to remain a minority shareholder and not intervene in such matters.

At the same time, the reckless and power-friendly attitude of majority shareholders triggers minority shareholders’ oppression. Moreover, to protect the minority shareholders’ interests, many countries have laws. Additionally, these law requires companies to disclose vital information regarding their financial performance and corporate decisions.

Furthermore, these shareholders enjoy dividends and profit with the company's perpetual growth. Besides, there is always a glass ceiling between minority and majority shareholders. They do not have permanency, the corporate imbalance always exists, and the board members can ignore and terminate their employment and remove them from the board by either buying them out or by force.

Various legal protections and rights are available to these shareholders that can help to safeguard their interests and prevent unfair treatment. Some of these protection rights include:

• Every minority shareholder, regardless of their minimal ownership, can vote in significant decisions.
• They have a right to receive compulsory dividends from time to time from the company.
• Furthermore, every majority shareholder has fiduciary duties towards these shareholders, to which they are entitled.
• Minority shareholders' rights allow them to raise questions, ask for a particular report, and document and inspect company records as per their interest.
• In most cases, they also enjoy voting rights in board elections.
• They share the right to the price discount offered to non-controlling interest shareholders.
• The company appoints a transferor to supervise the payment initiation to minority shareholders.
• A minority shareholder can take legal action against the majority shareholder for fraudulent, intentionally unfair, and illegal practices on the grounds of oppression.
• A court may give remedies in favor of the minority shareholders by ordering asset liquidation.
• The court can order the majority shareholders to buy out the minority shares at a reasonable price.

Let us understand the concept better with the help of an example.

Example #1

Let's assume that John and Jane are two owners of a pharmacy company where John owns 60% of the company, while Jane owns the remaining 40%. Hence, Jane is a minority shareholder who owns less than 50% of the company.

Therefore, Jane is entitled to a proportionate percentage of the company's profits and has the right to participate in company decisions. However, if John makes a decision that requires a majority vote, for instance, taking out a large loan, Jane may need more voting power to sway the outcome.

Hence, if John wants to take out $100,000 to expand the business, and the decision requires a 51% majority vote, in such case, he can approve the loan on his own as he owns 60% of the company's shares. Jane would need more voting power to block the decision in this situation.

Besides, as a minority shareholder, Jane could voice her concerns to John, suggest alternative financing options, or take legal action if she believes John is not acting in the company's best interest.

Example #2

An excellent example of minority shareholders' rights comes from Atos, a French IT solutions company, in September 2022, where a minority shareholder called for the company's chairman's resignation when the shares traded at a 30-year low.

They have requested that the chairman step down and the board be restructured, replacing people who have been part of the board for a long time. They also explained how they have engaged with the management, but now it's time for them to speak up.

Atos, as a company, has always given much significance to shareholders, but the shares of the company have dropped by 15%. As per Goldman Sachs, the company has lost the goodwill of investors, and changing the board is a good way to regain market trust. Many believe that lousy administration is the real problem of the firm.

In response to the request of the minority interests, the company has issued a statement affirming its commitment to developing a successful strategy that will also benefit the employees.

Advantages

• Such shareholders enjoy the minority shareholder discount in shares.
• They are free from involvement in business meetings and decision-making processes.
• Legal rights are given to shareholders to ask for any document, report, file, or error they want to discuss.
• These shareholders are not personally liable for the company’s debts or legal issues beyond the value of their investment.
• Moreover, these shareholders are entitled to a proportionate share of the company’s profits based on their ownership stake.

Disadvantages

• They become the victim of the majority shareholders' power abuse.
• Such shareholders observe a thick power imbalance between them and the majority shareholders.
• There is brewing oppression among minority interests.
• Limited control over the company’s decision-making process.
• They need more voting power to block major decisions.

• Minority shareholders possess less than 51% of company shares. In contrast, majority shareholders own more than 50% of company shares.
• Have less influence and rights in business operations and decision-making; on the contrary, majority shareholders control, manage and dictate important decisions.
• They cannot ignore or take majority shareholders for granted, but majority shareholders are known for their greed and power abuse in corporate structures.
• Depending on the share distribution, minority shareholders are fewer, whereas a group of majority shareholders comes together to form a liaison.

This article has been a guide to what is a Minority Shareholder. We compare it with majority shareholders, explain protection rights, advantages, and examples. You may also find some useful articles here -

• Shareholders Agreement
• Authorized Shares
• Shareholder Types