A minority shareholder is someone that owns less than 50 percent of a corporation’s stock. A minority shareholder does not exercise control over the corporation, but has interests that are subject to legal protection. The laws governing minority shareholders vary depending on the state, but aim to protect their legal rights and business interests.
Majority Shareholder vs. Minority Shareholder
A majority shareholder of a corporation owns more than 50 percent of the company’s outstanding shares, which entitles them to decision making power within the corporation. The majority shareholders have a legal responsibility to act within the best interests of the corporation, ensuring that their decisions serve both majority and minority shareholder interests.
Minority shareholders have the right to vote on important decisions affecting the corporation, but the majority shareholder is the ultimate decision maker. The voices and opinions of the minority shareholders are respected, but their power does not affect the final decision of the majority shareholder.
Minority shareholders can file a lawsuit when they believe the majority shareholder is violating their fiduciary responsibilities. If a majority shareholder is suspected of using corporate funds for personal reasons, or intentionally deceives investors, the minority shareholder can hold them liable through a derivative claim.
Shareholder agreements are essential to protecting the rights of all shareholders, whether they are the majority or minority. Power to make decisions is given to the majority shareholder, so a shareholder agreement should specifically outline the rights and responsibilities of the minority shareholders.
In the event of a corporate crisis, the rights of the minority shareholder can be oppressed. It is important that the shareholder agreements have stipulations on what minority shareholders can do with their stocks if the company’s direction changes. Stipulations should include directives on buy-sell, first refusal, and redemption provisions, such as the distribution of losses, profits, and dividends, and the shareholder’s rights to buy or sell their shares. Small corporations that have family and friends as shareholders often have shareholder agreements that were made in good faith, but without anticipation of a corporate crisis. This often leads to chaos and dissention among shareholders.
Rights of Minority Shareholders
Legal protections for minority shareholders vary from state to state, but typically offer protection in the following areas:
- Fiduciary responsibilities of majority shareholders: Minority shareholders have a right to expect majority shareholders to treat them with respect, honor their dignity and loyalty to the corporation, and to always work in the best interests of the corporation.
- Access to corporate records and financial information: Minority shareholders have the right to attend corporate meetings, vote, and have access to the corporation’s records and financial information upon request.
- Minority shareholder discount: When a corporation plans to sell or transfer ownership, a minority shareholder is entitled to buy shares at a lower price than outside investors.
- Shareholder benefits: Minority shareholders have the right to dividends and to sell their shares for profit. If a majority shareholder suppresses these rights, the minority shareholder can file suit.
Philadelphia Business Lawyers at the Harty Law Group Protect Shareholders
If you are involved in a business or shareholder dispute, the experienced Philadelphia business lawyers at the Harty Law Group provide counsel and representation for all the legal needs of your business. Call us at 267-262-5650 or contact us online to schedule a consultation today. Our Philadelphia and Haddonfield, New Jersey offices serve clients throughout Pennsylvania and New Jersey.