In this article, we will explain “what is a minority shareholder?” and “what powers does a minority shareholder have?” by exploring what differentiates a minority shareholders from majority shareholders and what a minority shareholder can do if they believe they are being treated unfairly.
A minority shareholder is a shareholder who does not hold majority control over a company (less than 50%). A majority shareholder, in contrast, holds over 50% of the shares within a company and therefore holds a majority of the power. For more on minority and majority shareholders, see What Is Oppression of Minority Shareholders?
A minority shareholder can hold some power, but they do not hold full majority control as they, individually, own less than half of the company. Conversely, a majority shareholder is one who does hold full control over a company by owning the majority of the company’s shares. Because a majority shareholder owns over 50% of the company, this gives him or her power over the company’s decisions, and limits the power held by the minority shareholders. When a company decision needs to be voted on by shareholders, the majority shareholder will be the one who can essentially make or break the decision as they have the most power and control. A minority shareholder can vote and have their perspectives heard, but their votes are not enough to directly impact a company’s decision.
Often, minority shareholders can be disregarded in favor of the opinions of majority shareholders (See: What is Oppression of Minority Shareholders?). Because of this, they often do not have much direct power over the company and its decisions. Any decision made will fall within the hands of the majority shareholder to decide. However, the minority shareholders are protected by some guaranteed legal rights. One power that minority shareholders have is to make a derivative claim against a director or officer within a company who the minority shareholders believe is not acting within their fiduciary responsibility, such as using company funds for personal use or misleading their investors.
One major protection for minority shareholders is protection from unfair prejudice against them from the majority shareholders and/or company leadership, such as directors. Often, these company leaders are also the majority shareholders. An action is considered unfair prejudice when it breaches the agreement made between shareholders and a company and negatively impacts a minority’s capacity as a shareholder.
If a minority shareholder believes they are facing unfair prejudice, they can form a legal case. In the example we began with, Bruce was our 60% majority shareholder of Wayne Enterprises, giving him ultimate decision making power. If Lois and Clark, two of our minority shareholders, believe that Bruce’s actions as a leader of the company are affecting the minority shareholders unfairly, they have the right to take Bruce and the company to court. In court, the minority will be required to prove that company leadership breached their fiduciary duty by breaking the set agreement and impacting the shareholder’s capacity. If this is proven correct in the court, the company will face financial consequences deemed by the judge, which may be severe.
A minority shareholder should be cautious when beginning this process, as it is expensive and time consuming, but it is one of the most significant protections in place to defend minority shareholders against potentially-problematic company leadership. It is recommended to seek professional legal advice prior to beginning this process to ensure you have a strong case.
For more on protections for minority shareholders from majority shareholder power abuse, see Can a Minority Shareholder be Forced to Sell Their Shares?