Definition of Minority Shareholder

A minority shareholder is defined as a shareholder who does not exert control over a company. The majority shareholders almost always exert an absolute control over the company, its management, its board of directors, and so on. But there are many companies that are controlled by shareholders who own only 40 percent, 30 percent, 20 percent, or less of the shares, and whom however exert full control over the company, as the remainder of the shares are scattered among a large number of shareholders, with every one of them having a minimal percentage being unable to gather a number of shares which is similar to those of the majority shareholders. In this event, all minority shareholders who are scattered, although together they could control even 80 percent of the shares, are defined as minority shareholders, as every one of them is a minority shareholder, and they cannot assemble enough votes to act as majority shareholders.

There are also cases where there are two or three groups of shareholders, with every one of them having 10 percent or 20 percent of the shares, and who are minority shareholders. They can elect their members to the board of directors and split the control or they can make coalitions between two groups of shareholders against two others, etc. Here also, those who control the

company are the ‘majority’ shareholders, as they have the majority of the seats in the boards of directors, even if in reality they have less than 50 percent of the shares of the company, while those who do not control the board of directors are defined as minority shareholders even if they own together the majority of the shares. In many cases, the shares are distributed

among a large number of shareholders who own each a few percentages, one percent, or even less of the shares. In those cases, or if the managers own themselves a few percentages of the shares, the management of the company manages often to get the control of the company and of the board of directors, and they can do what they wish in the company, as the shareholders are too scattered and cannot exert their power.

The definition of minority shareholders will be therefore shareholders who do not exert control over the board of directors of the companies, even if together they own the majority of shares, and the majority shareholders are defined as those who control the board of directors of

companies, even if effectively they own much less than the majority of the shares. The analogy between this situation and the political system of nations is clear. Companies are still at the stage of oligarchies and have not reached the status of democracies.

As far as we could analyze, most of the public companies traded in the stock exchanges of the US, France and Israel, are controlled by groups of shareholders who own less than 50 percent of the shares of the companies. If the minority shareholders who are effectively the majority

would be conscious of their power, and if the boards would be elected only in proportion to the ownership while the remainder of the members would be elected by activist associations, this could revolutionize the modern business world, safeguard the rights of minority shareholders, and prevent the abuse of the shareholders by oligarchies backed by the executives of the companies.

2) Rights of minority shareholder as per Company law

The rule in Foss v Harbottle

The rule in Foss v Harbottle (1843) 2 Hare 461 provides, in essence, that, if a wrong is done to a company, then it is the company who is the proper party to bring an action. The rule is designed to avoid shareholders bringing a multiplicity of actions

Accordingly, a number of exceptions have been established to the rule where a minority shareholder is able to bring an action on behalf of the company:

where the act is beyond the objects of the company or is illegal;

where the matter is one which could only be validly done by a special majority of members (in other words, the matter cannot be ratified by means of an ordinary resolution)

where the member has a personal right, for example, a claim based on enforcement of the articles pursuant to s 14 . In this case, the action would be brought by the shareholder in his personal capacity and not on behalf of the company. The shareholder must be able to demonstrate direct personal loss and not merely a general loss to the company which all shareholders suffer;

where the act amounts to a fraud on the minority. In order to use this exception, the shareholder must be able to demonstrate:

some form of equitable fraud, such as expropriation of the company’s property or even negligence by a director, will suffice, but only where he profits from such negligence (Daniels v Daniels [1978] Ch 406);

that the wrongdoers are in control of the company – it is not entirely clear what constitutes control but the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)

[1982] Ch 204 appeared to accept that control meant de facto control and not just control through holding a majority of the shares; and

that a majority of independent shareholders support the action on behalf of the company (Smith v Croft (No 2) [1988] Ch 114).

In practice, this exception is of very limited use for minority shareholders, since the amount of time and expense required in order to establish their locus standi to bring an action on behalf of the company is often disproportionate to the remedy actually achieved. In any event, any damages awarded go to the company rather than the individual shareholder, since the action is brought by the shareholder on behalf of the company.

Section 459

Section 459 provides that a shareholder is able to seek relief from the court on the basis that:

the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

The House of Lords in O’Neill v Phillips has, however, held that the failure to meet a shareholder’s ‘legitimate expectation’ would not generally amount to unfair prejudice in the absence of some more precise agreement between the parties.

The judgment clarified and restricted the circumstances in which a 459 petition would be granted as follows:

‘unfair prejudice’ would generally require a breach of the terms upon which the shareholder had agreed the company’s affairs would be conducted; however as the relationship between a company and its shareholders would be considered by equity to be a contract of good faith, unfairness would also arise where a legal right (such as a power under the Companies Act) was used in a manner equity would regard as contrary to good faith.

Just and equitable winding-up

Section 122(1)(g) of the Insolvency Act 1986 permits a court to wind up a company on the ground that it is just and equitable so to do. There are a number of points to note about this remedy:

In order for a member to seek a winding-up order, he must be a contributory, that is, a person liable to contribute to the assets of a company on winding-up (s 79 of the Insolvency Act 1986); for example, a member who holds partly-paid shares. The courts permit the holders of fully paid up shares to present a petition provided that they establish a tangible interest in the company’s winding-up and, therefore, no application can be made by them if the company is insolvent.

The member must have held his shares for at least six months during the 18 months prior to the commencement of the winding-up or the shares must have devolved on him through the death of a former member (s 124(2) of the Insolvency Act 1986).

The court will not make an order if some other remedy is available to the petitioner and he is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.

The court will apply general equitable principles in determining whether to make an order under this section and, accordingly, the petitioner must come to the court with clean hands.

3) Problems faced by the minority shareholders/benefits of majority shareholders over minority shareholders

The origin of the abuse of minority shareholders comes mainly from the greed of some of the majority shareholders, who in some cases has no limit. Those majority shareholders believe that they can do anything, risk more and more,since they find themselves unpunished, while remaining within the very large margins of the law. The minority shareholders who are wronged do not learn the lesson and continue to invest in companies which are conducted in an unethical manner. This is why it is needed to examine in depth the legal protection of those minority shareholders and its efficiency, in order to verify if the law suffices for their protection, or if the minority shareholders need an ethical protection, which has a much wider scope.

Members of society have a tendency to overlook events that do not concern them directly, and it is against this indifference that one has to fight, as an immoral ambiance has a tendency to penetrate to all domains thus affecting all members of society. One is always a client, or a minority shareholder, or a supplier, or at least a member of society, who is affected by ecological crimes or others. An immoral ambiance will make all of us victims, exactly like a totalitarian regime turns ultimately against the majority of its citizens.

We live in a time of mergers and acquisitions‚ and in many cases‚ the shareholders having the control of the companies with 30 percent or 40 percent of the shares want to merge with another company or privatize their company by forcing the other shareholders to agree to a takeover bid. This bid is done in most cases when the shares’ price is very low‚ after having

collapsed due to market conditions‚ unexpected bad financial results or indirect manipulation of the shares’ prices.

One should not forget that the market heavily penalizes companies that fall short of obtaining their forecasted results. We can imagine that the CEO of a company with the collaboration of the majority shareholders‚ who decide on his remuneration‚ give a growth forecast of 50 percent‚ which is much higher than the actual growth. The analysts take this growth in consideration and

give the valuation of the company a high multiple of the current profitability that can reach even 100. The company makes a public offering and the majority shareholders who are insiders sell part of their shares‚ for example 10 percent. If later on‚ the growth is much less than forecasted and the company expects losses‚ the shares’ price may collapse by even 90 percent.

“Insider trading‚ or the use of insider information‚ represents a special case within this category: it involves the use of confidential information about the firm’s future performances by the employee on the financial market‚ in order to realize a speculative gain for himself or for some third party. Such practices are to be condemned for two reasons:

1 – The employer is in fact robbing his or her own firm‚ since she could only receive the crucial information as a member of it. Moreover‚ he or she only received this information under the condition that s/he would use it to serve the corporate interest.

2 – Third parties have also been damaged: those agents who were deprived of the information while dealing on the same financial markets or contracting with the same firm will unjustly suffer losses as a consequence of the practice.”

(Harvey‚ Business Ethics‚ A European Approach‚ Gerwen van‚ Employers’

and employees’ rights and duties‚ p.81)

Guido Corbetta‚ in one of the rare articles on the ethical questions in the relations between companies and shareholders divides the most common forms of ownership of medium-sized and large companies in four categories:

“1. Family-based capitalism: ownership is concentrated in the hands of one or a few families‚ which are frequently related to one another. Sometimes one or more members of the family is directly involved in running the company…This form of ownership is particularly common in Italy‚ but there are large family businesses practically everywhere.

2. Financial capitalism: ownership is concentrated in the hands of one or just a few private and public financial institutions which‚ through a system of cross-holdings‚ control companies and intervene in their management… Ownership also implies powers to appoint management and steer corporate strategy…This form of ownership (with some slight differences) prevails in Germany‚UK,Japan and some other countries like Holland and Switzerland; it is rapidly

becoming more common in France too.

3. Managerial capitalism: ownership is shared among numerous stockholders‚none of whom exercises any significant control over the activity of the managers who run the companies. The management of these companies therefore becomes a kind of self-regenerating structure… It is particularly important in the Anglo-American business world.

4. State capitalism: through central and peripheral agencies or corporations set up ad hoc (as in the case of‚ for instance‚ IRI and ENI in Italy)‚ the state has direct control over the companies. The existence of this form of capitalism clearly stems from a certain view of state intervention in the economy. In Italy‚ France and Spain there are major groups belonging to this category…

The management of management-controlled companies are reluctant to hand over many of their autonomy to the shareholders. This increases the possibility of anti-company behavior on the part of the managers‚ who are concerned only with getting the maximum personal gain even when this puts the very survival of the company in jeopardy. Corbetta concludes that the

governor-shareholder is not morally justified in using the company for his own ends‚ not even considering that his own compensation is secondary to that of other stakeholders. This article summarizes in a very efficient way all the analysis of the struggle for power and the different sets of interests between the majority and minority shareholders‚ and emphasizes the risks that

the small shareholders incur from not controlling in fact the companies‚ thus enabling the majority shareholders to misuse their power and to wrong the other shareholders.

The ‘governors’ are convinced that if they are strongly involved with the companies‚ they control it and they supply it with funds‚ they have the right to do whatever they want with ‘their’ companies‚ and the minority shareholders are treated like speculators‚ who are not interested in the well-being of the companies but rather in a quick return on their investment. Even if this is true in certain cases‚ this does not decrease the rights of the minority shareholders‚who are in many cases interested in the fate of the company no less than its governors. The cases of the managerial companies are even more dangerous for minority shareholders as the directors jeopardize the company itself in order to increase their personal benefits.

The democracy of the shareholders is completely utopic‚ the shareholders can shout‚ protest‚ be indignant‚ criticize or threaten on the Internet or in the shareholders’ meetings‚ yet their influence is in most cases nil in all categories of the companies. This is the reason why they have to obtain new rights‚ even if they do not request it yet. In many cases the minority shareholders collaborate unknowingly with the majority shareholders in order to despoil

their own rights. They have the opportunity to participate in shareholders’ meetings‚ which are in many instances a ridiculous circus‚ manipulated very skillfully by the majority shareholders‚ who are assisted by the management of the companies. And even if they participate in the meetings‚ which is very rare‚ they have no chance to win against the oiled machine of the owners who control the companies. The cases described in this book illustrate those statements and show how it is possible to eliminate from the protocol touchy questions and answers to minority shareholders‚ how is it possible to treat as a ridiculous Cassandra troublemakers who disclose the schemes of the owners‚ thus even augmenting the adhesion of the other shareholders‚ and how ultimately the minority shareholders cooperate unknowingly or against their wishes in the schemes of the majority shareholders. The world economy becomes more and more concentrated in the hands of a small number of huge organizations‚ which control the economy‚ without being adequately controlled by the governments and the citizens‚ and least of all by the shareholders. In 1994‚ 1‚300 companies have participated in

mergers amounting to $339 billions. And today the mergers are even larger.The modern empires of companies are much more influential than the monopolies of the Carnegies and the Mellons. The profits of Wall Street in the last years of the century were stunning. The volume of the financial transactions of the ‘90s is 40 times higher than the productive economy of the

US‚ while the volume of transactions of CS First Boston is higher than the GNP of the US. The SEC has not the necessary funds to control effectively those giants and the only safeguard against them is ethics. Majority shareholders‚ executives and members of the boards of directors

benefit from insider information‚ which is not accessible to minority shareholders. If the insiders utilize this information to buy or refrain from buying shares of the companies‚ they commit a despoliation of the rights of the minority shareholders. They risk nothing in buying the shares‚ as they know in advance that their prices will increase as a result of good financial results‚ a merger or a scientific discovery. On the contrary‚ if they sell their

shares before the publication of negative financial results‚ they do not incur losses from the collapse of the shares’ price.

4) Grievances of Minority shareholders

There are several LAWS OF WRONGDOING TO MINORITY SHAREHOLDERS IN UNETHICAL COMPANIES some of them are

1 – In unethical companies, the minority shareholders will always lose in the long run.

2 – Unethical managers tend to work on the verge of the law, finding loopholes, and getting the legal advice of the best lawyers, in cases of wrongdoing to the minority shareholders.

3 – Boards of Directors and executives of companies tend to safeguard primarily the interests of the majority or controlling shareholders, who have appointed and remunerate them.

4 – Independent Directors, who are appointed by the executives, decisions of their committees, and fairness opinions that they order, are in many cases unreliable to minority shareholders, as they tend to comply with the opinions of the majority shareholders.

5 – Auditors, underwriters, analysts, investment bankers, and consultants are loyal primarily to the executives who remunerate them, and the minority shareholders should be cautious with their reports and recommendations.

6 – When examining the reports of analysts and their ‘buy’ suggestions on companies, one should bear in mind what are the interests of the analysts, if they own shares of the companies, and what is their success record until now.

7 – The legal system does not safeguard in most of the cases the rights of the minority shareholders, who cannot fight on equal terms with the companies that are assisted by the best lawyers, and have much more time and resources.

8 – Companies tend sometimes to accommodate large institutions, which were wronged as minority shareholders, mainly by indirect compensation.

9 – The SEC is in many cases a panacea that is indifferent to wrongdoing to minority shareholders and to creative accounting.

10 – Society does not ostracize unethical managers and believes that ethics should be confined to the observance of the laws.

11 – Minority shareholders should refrain from investing in companies whose ultimate goal is to maximize profits, as it would in many cases benefit only the profits of the majority shareholders and executives.

12 – Minority shareholders should invest in companies having ethical CEOs,as they would probably safeguard their rights and not be loyal exclusively to the majority shareholders.

13 – Minority shareholders are often perceived as speculators, who do not care for the welfare of their companies, but are greedy and interested in an immediate and riskless return on investment.

14 – The perception of the minority shareholders as greedy and speculators, and the lack of personification to the nameless individuals, legitimize in many cases wrongdoing to them.

15 – Unethical companies tend to avoid transparency and publish opaque prospectuses, press releases and financial statements. Transparency is therefore the main safeguard of the minority shareholders.

16 – Shareholders should compare the prospectuses with the press releases and interviews of the executives and owners of the companies. If there is double talk and the information released to the SEC does not comply with the press conferences, it could indicate that the companies are in trouble.

17 – Minority shareholders should read carefully all the information accessible to them, participate in the stock talks on the Internet, and have a fair understanding of financial statements. If not, they should abstain from investing directly in companies and should rather invest in Ethical Funds.

18 – The conduct of the shares’ price prior and subsequent to a public offering indicates the ethics of a company, especially if price increases substantially before the offering and collapses a short time afterwards.

19 – Minority shareholders should avoid investing in companies whose executives do not own their shares or have sold most of them, and whose controlling shareholders sell a large part of their shares at public offerings.

20 – Executives of many companies tend to receive warrants when the shares’ price is at their lowest point and sell them at the end of their restriction period, when their prices reach a maximum. Minority shareholders are invited to read this information on the Internet and imitate their conduct.

21 – Unethical executives tend to benefit from inside information in buying and selling their shares and minority shareholders can receive indications on the future profitability of the company by following on the Internet insiders data. Selling of shares by insiders indicates future losses and buying of shares indicates favorable prospects.

22 – Companies that want to sell a subsidiary partially owned by them to a fully or majority owned affiliate company tend to convey the impression that the situation of the subsidiary is precarious, with no potential acquirers, in order to justify the collapse of its price and the acquisition of the subsidiary at a token price by the affiliate company.

23 – Unethical companies have double standards for their shareholders. They may convey the impression that they are on the verge of bankruptcy in order to discourage the minority shareholders, and after the controlling shareholders and executives buy their shares at minimal prices, make public encouraging prospects in order to increase their shares’ price.

24 – Companies tend to be privatized before the end of revolutionary products’ R&D or after the implementation of a successful turnaround plan, when the shares’ prices are still low, by forcing the minority shareholders to sell their shares at those prices, and concealing those prospects to them.

25 – Delaware’s Laws give extreme license to the controlling shareholders to do whatever they want in their companies and enable them in some cases to commit wrongdoing to minority shareholders without giving them a fair possibility of retaliation.

26 – Majority shareholders and executives tend to conceal their true motives of depriving the rights of the minority shareholders behind altruistic talks of saving employment, assisting the community and helping the economy.

27 – Minority shareholders should suspect government officials who are supposed to safeguard their rights if the law enables them to be recruited by the companies that they were supposed to control.

28 – Shares’ transactions that are executed in August, during the vacations, around Christmas, New Year’s eve, or in other periods, where most of the minority shareholders are out of town, are often meant to wrong them without giving them the opportunity to interfere.

29 – Shareholders’ meetings are in many cases orchestrated in such a way that minority shareholders cannot express effectively their discontent, and even if they do so the protocols of the meetings do not report it.

30 – Minority shareholders should beware of companies that expense too often extraordinary losses, charges for in-process technology, acquisition costs, contingent liabilities, and make huge reserves for non-recurring charges on restructuring plans. Those losses may be a heaven, concealing operational losses, and precursory of the imminent collapse of the company’s valuation.

31 – Minority shareholders should refrain from investing in companies that are controlled exclusively by the majority shareholders, especially if those own less than 50 percent of the shares, and allow no representation of the minority shareholders in their Boards of Directors.

32 – Activist associations should gather information on unethical companies, shareholders and executives and publish it on the Internet and to minority shareholders. People tend to forget or do not have access to this data and the activists’ responsibility is to make the relevant information accessible to all.

33 – Disclosers of unethical conduct of companies toward minority shareholders should be encouraged by rewards, esteem and recognition, and should not be ostracized by society as whistle-blowers.

34 – Individual shareholders who have lost in the stock market, due to an unethical conduct of companies, should publish the information on the Internet, the press, the SEC, among their friends, and try to get the maximum coverage for the wrongdoing of unethical companies.

35 – Minority shareholders should only resort to ethical means if they have to fight the companies that have wronged them, as in an unethical combat the stronger parties will always win.

36 – The minority shareholders should put a very high emphasis on the ethics of the companies and the integrity of their managers and owners in their investing considerations and refrain from investing in unethical companies that might wrong them, even if those companies have excellent prospects.

5) Procedural Hurdle-case law

6) judicial inflexability- case law

7) reform on the subjects.

INTERNET AND TRANSPARENCY AS ETHICAL VEHICLES

In the business world‚ as in the political and social world‚ the tendency is for everybody to mind their own business‚ and even if the rights of others are wronged they seldom interfere‚ as they do not want to make enemies‚ they do not have time for such occupations‚ . But if it is possible to denounce the crimes without being discovered‚ there is a tendency to do so‚ in order to

have a clean conscience. The Internet is the best vehicle to do so as it enables you to retain your anonymity while disclosing to the whole world the facts that prior to then were hidden. Light is the worst enemy of criminals who prefer to work in the dark. In some business circles the law of Omerta(Silence‚ like in the Mafia) prevails‚ and rarely does someone dare to transgress this law. But the Internet changes this setup‚ as the whistle-blowers remain concealed and the truth is revealed.

The ideal would be that companies would be transparent to the shareholders and that all the shareholders would receive simultaneously the same information‚ whether they are minority or majority shareholders. No more insider information‚ no more abuse at the detriment of shareholders who live far from the headquarters of the company and who have no access to the

information divulged by the insiders to the boards of directors. We could also imagine a black list‚ established by activist associations and published on the Internet‚ of companies and persons who do not behave ethically‚ who went bankrupt‚ who were condemned by the courts. Accessible to everyone around the world‚ this list could induce the companies and their executives to conduct themselves ethically and legally‚ make their utmost effort not to go bankrupt and to repay their debts even if they do not have a legal obligation to do so. It

would be recommended to achieve an ethical responsibility of companies‚ and of their executives and owners‚ that would not be limited. Responsible executives and companies are the safeguards of the interests of the stakeholders‚ minority shareholders and the community. The leitmotiv should change from ‘I am doing my best to diminish to a minimum my

responsibilities’ to ‘I should behave responsibly toward my employees‚ all my shareholders‚ my country‚ my customers‚ ecology‚ and first of all toward my conscience.

Distribution of rewards

Another efficient method that could prevent the abuse of the rights of minority shareholders could be the distribution of rewards to the persons who divulge this wrongdoing of the companies‚ whether it is unethical or illegal.We enter here into a very problematic domain of the fidelity toward a company where we are employed‚ as the majority of the whistle-blowers

would probably be employees of the companies concerned.

ETHICAL FUNDS

It is well known what happened in 1929‚ when there was no legal or ethical system to slow down the stock exchange speculations. It is not by sheer altruism that the SEC was established‚ following the recession and the collapse of the economic system in the ‘30s. The reform that ensued was opposed very strongly by the advocates of free enterprise. Thousands of

people had to die from hunger‚ millions had to lose their jobs‚ a whole nation had to be impoverished‚ in order to convince the advocates of the ‘dirty invisible hands’‚ and that those hands had to be washed from time to time in order to obtain a minimal hygiene in business. In