There are multiple types of mergers and acquisitions and all those types share a common factor—complexity. M&As are not only complex but there is a shift of control and ownership which often leads to disagreements between shareholders and other stakeholders.
Major shareholders often have the upper hand in decision making, which makes minority shareholders vulnerable. In simple words, shareholder oppression is common, especially in private companies and closely held corporations.
The question arises, how to protect minority shareholders? In fact, how can minority shareholders protect themselves? Well, this is where legal frameworks come in. There is a common law for protection of minority shareholders, but you may expect variations in different states and countries.
In the text to follow, you will learn about minority shareholder rights and the legal protections available.
Minority Shareholders Defined
Minority shareholders are the investors or business owners who collectively own 49% or less shares in a private or public company. Investopedia says minority shareholders usually have 20%-30% interest in a company.
How influential are minority shareholders? It depends on their stake in a company and the size of the company itself. For example, a minority shareholder in a private company may have a bigger stake as compared to a minority shareholder in a public company.
Rights of Minority Shareholders
The legal rights of minority shareholders in the US protect minority shareholders in the regular course of operations as well as in mergers and acquisitions. Here is a breakdown of both.
Four Major Rights for Minority Shareholders
Right to Fair Treatment
it is among the fiduciary duties of the major shareholders in a company to protect the interests of minor shareholders. US state laws specifically allow the minor shareholders to pursue a legal course of action if the major shareholders fail to fulfill their fiduciary duties. Minority shareholders can also be a part of due diligence in mergers and acquisitions to ensure their rights are being protected.
Right to Vote
A legal right of shareholders is to vote on the major decisions of the company. These decisions may include
· Mergers and acquisitions
· Nomination of the board members
· Changes in the governing documents
It is important to note that minority shareholders’ voting rights are only available to common stockholders. Preferred stockholders usually don’t have these rights.
Right to Information
Minority shareholders have the right to inspect company records like
· Meeting minutes
· Financial statements
· Tax records, and other important documents
Both federal and state laws in the US entitle shareholders to request access to these records by submitting a written demand specifying the purpose. This right allows shareholders to review key information and ensure transparency.
Right to Dividends
Minority shareholders have the right to receive dividends based on the number of shares they hold. However, dividend distribution varies by share class. Preferred shareholders receive fixed dividends before common shareholders, who get dividends if the company decides to distribute profits.
Public companies disclose dividend information through investor relations channels. Private companies provide this information through shareholder agreements and direct updates to shareholders.
Minority Shareholders Rights in Mergers and Acquisitions
minority shareholders are also protected from unfair treatment during M&As. Here are the major rights of minority shareholders in M&As.
Appraisal Rights
Minority shareholders have the right to demand an independent valuation of their shares if they think buyout terms are unfair. This right makes sure they get the right market value for their shares if they are forced to sell.
It is important to note that this right is not available for public company shareholders in some states in the US unless they receive
· Debt
· Cash
· A mixed consideration in the transaction
Preemptive Rights
Preemptive rights allow minority shareholders to buy newly issued shares before they are offered to outside buyers. This protects them from dilution of their ownership. These rights can help maintain their percentage of ownership during an acquisition. However, these rights only apply if the company’s governing documents include them.
Tag-along Rights
Tag-along rights allow minority shareholders to sell their shares with the majority shareholders when they decide to sell their stake. Tag-along rights do not force minority shareholders to sell. They protect by allowing them to exit the business if they choose.
What are the Legal Frameworks Available for Minority Shareholders
Minority shareholders can directly sue the majority shareholders to battle shareholders’ oppression. They can also use another approach (derivative lawsuits), which allows them to sue on behalf of the company. The objective in both cases is to protect shareholders’ rights. Here are four common legal options available for minority shareholders.
Injunctive Relief
The remedy of injunctive relief mandates the majority shareholders to implement particular measures that recover minority shareholder rights. Independent directors could be selected together with the elimination of oppressive bylaws on offer.
Financial Remedies
The damages suffered from oppression and corporate misconduct require minority shareholders to receive compensation through financial means. The remedies usually work together with injunctive relief and extra actions to counteract the harm.
Buyout Options for Minority Shareholders
Courts can order majority shareholders to buy out minority shares at a fair price, offering a favorable exit for minority shareholders. In some cases, courts may also order a buyout of the majority shares to stop oppressive behavior.
Dissolution of the Corporation
Minority shareholders may seek the dissolution of the corporation to end oppression. While dissolution can be an effective solution when cooperation is impossible, petitions may be dismissed if there’s insufficient evidence of oppression or a “true deadlock.”
Conclusion
Minority shareholders have the right to be treated fairly and use their votes in important decision making. They can sue major shareholders directly or through the company if their rights are violated.
