{"id":3619,"date":"2018-02-02T08:40:45","date_gmt":"2018-02-02T08:40:45","guid":{"rendered":""},"modified":"2019-08-06T15:16:27","modified_gmt":"2019-08-06T15:16:27","slug":"shareholders-company-shares","status":"publish","type":"post","link":"https:\/\/www.lawteacher.net\/free-law-essays\/company-law\/shareholders-company-shares.php","title":{"rendered":"Shareholders’ Company Shares"},"content":{"rendered":"

COMPANY LAW: PROTECTION OF MINORITY SHAREHOLDERS IN UNLISTED COMPANIES <\/strong><\/p>\n

Introduction<\/h2>\n

The inexorable growth of companies and the increased shareholder sophistication in recent years have led to stronger demand for shareholder rights and remedies that safeguard the interests of investors from errant and manipulative management. While disgruntled shareholders of public listed companies have the option of selling their shares in the open market, the same course of action is not open to shareholders of unlisted private companies, since there is no ready market for private company shares. Minority shareholders of these companies in particular are therefore vulnerable to corporate fraud by majority shareholders who are often in control of the company.<\/p>\n

This essay reviews existing legal avenues for the protection of minority shareholders and presents the functionality and limitations of these legislative and regulatory controls in achieving the intended outcomes.<\/p>\n

A case for minority shareholders protection<\/h2>\n

Minority shareholders are defined as individuals or entities holding less than 50% of the company stocks. Most companies require the capital injection of major and minor investors alike. In private companies, the majority shareholders are normally also the directors or founders of the companies who have direct control over the daily management of the firm. The protection of minority shareholders interests is crucial to encouraging investment. If majority shareholders are permitted to use their power to further other interests at the expense of minority shareholders’ interests, then the latter will be discouraged from investing in that market. This can substantially reduce the amount of local and foreign investment. For example, investors who may have purchased 10% of corporations are likely to invest in markets that provide them greater returns and security.<\/p>\n

Foss and Harbottle [1843]<\/h3>\n

The controlling power of majority positions is generally accepted. This is partly due to the popular ruling of Foss and Harbottle (1843) 2 Hare 461, 67 ER 189<\/em>, a famous English precedent on corporate law. The case involved two minority shareholders who initiated legal proceedings against directors of the company for misappropriation of company assets. The court dismissed the claim and established two rules. Firstly, the \u201cproper plaintiff\u201d rule states \u201cthe proper plaintiff in an action in respect of a wrong alleged done to a company … is prima facie the company itself.\u201d This implies minority shareholders do not have unlimited prerogative to exercise personal legal proceedings against the directors. Secondly, the case also established the power of majority in that \u201cwhere the alleged wrong is a transaction which might be made binding on the company … on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that if a mere majority of the members of the company … is in favour of what has been done then cadit quaestio<\/em> \u2013 the matter admits of no further argument.\u201d<\/p>\n

Obviously, these rulings do not protect minority shareholders from directors who commit fraud themselves and they have since been developed to provide four exceptions:<\/p>\n