Minority Shareholders

Minority shareholders are shareholders of a corporation who own less than 50% of the voting rights and who individually are unable to control the corporation. Minority shareholder status is related to the proportion of voting power held by a shareholder, not by the proportion of shares held: Some share classes may have no or limited or multiple voting rights.

The key ethical issue is that, because they are in the minority, they have an ineffective voice in corporate governance and those in the majority may operate the firm for the majority's advantage and to the unfair detriment of the minority. This acts as a disincentive for small shareholders to invest in equity markets. Minority shareholders themselves may also act unethically by acting as free riders—that is, they rely on majority shareholders to invest resources in monitoring management and benefit from that monitoring without making a proportionally similar investment.

The Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance makes it clear that protection of minority shareholders from abuse is part of good corporate governance. Examples of abuse include transfer of value to companies owned by controlling shareholders through asset sales or unusually favorable supplier or customer contracts; new stock issues, especially of nonstandard share classes (shares with voting rights only are useless to minority shareholders); and for nonlisted companies, placing restrictions on the sale of shares, which prevents minority shareholders from liquidating their holdings. Minority shareholders who seek income from their investment may be harmed by the refusal of the majority to pay dividends.

Minority shareholder rights may be protected either ex-ante (prevention) or ex-post(cure or compensation). Ex-ante protections may be found in the legislative and regulatory framework for minority shareholder protection, a corporation's constitution, and stock exchange [Page 1393]listing rules. Examples include whether shareholders can force the convening of a General Meeting, and, if so, whether this requires the signatures of a minimum number of shareholders, or shareholders with a minimum proportion of voting rights; whether proxy voting is permitted or personal attendance at General Meetings is required; whether a supermajority is required for specified resolutions; and whether controlling shareholders are required to buyout minority shareholders at an independently determined price in the event of delisting. Ex-post protection is provided mainly through the court system, either by means of court orders preventing certain actions or by means of tort action for compensation for wrongful harms; in extreme cases, a court may dissolve the corporation. The extent to which this is effective is related to whether regulatory bodies have sufficient resources to monitor and take action and whether litigants have ready and affordable access to corruption-free courts.

Minority shareholders are in a particularly vulnerable position in developing countries, where the agency problem (which results from the separation of ownership and control) has materialized as one between majority and minority shareholders rather than one between owners and managers. This often results from either a prevalence of family-owned businesses, typical in Asia, or foreign companies setting up majority-owned subsidiaries to meet government requirements. The outcome is poorly developed equity markets in many countries, including many in subSaharan Africa, which negatively affects the country's economy as a whole. Because the United States has a low ownership concentration and high ex-post protection compared with other countries, such issues have far less impact there; nevertheless, they remain a significant issue for some family-controlled businesses.

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