Minority stockholders can have outsized influence

On Behalf of | Mar 28, 2024 | Firm News |

In business, a minority shareholder holds less than half of a company’s shares. This person usually has limited control compared to majority shareholders who own more than half. Still, there are ways a minority shareholder can gain significant influence.

Understand the board

The board of directors makes critical decisions for the company. Minority shareholders can work to place allies on the board. They can support candidates who align with their vision by voting in director elections. Sometimes, if a company is not meeting expectations, other shareholders might also want change. They could join the minority shareholders in voting for new directors.

Use shareholder agreements

Shareholder agreements can be a powerful tool. These are contracts between shareholders that outline how the company should operate. They can include rules on voting, selling shares, and running the business. A smart minority shareholder might use these agreements to secure more power. For example, they could have terms that give them extra votes or the right to appoint a director.

Seek allies

No one can do it alone. A minority shareholder might look for allies among other shareholders. Together, they can form a bloc that controls more of the company. If they agree on what they want, this group can push for changes. They can vote together at shareholder meetings to have a stronger voice.

Legal action may be possible

If the above approaches fail or aren’t an option, the law can sometimes help. Minority shareholders have rights; if they feel the company or other shareholders are unfair, they can go to court. They can claim “unfair prejudice” if the majority’s actions harm the company or their interests. It usually involves one of two scenarios:

  • There is a material failure to abide by the company’s articles of association, which will ordinarily govern how the board conducts the company’s affairs.
  • Majority shareholders ignore equity-based obligations, harming minority shareholders.

Successful arguments of either can lead to court orders that change how the company operates.

Legal guidance is crucial

A business law attorney with experience can be vital to the minority bloc’s success. The client needs to understand the nuances of the company’s articles, but legal and business strategy will also come into play. Armed with persistence, experience and knowledge, minority parties can greatly impact the company’s future.