What is a Shareholder?
An individual who owns shares (stocks) within a company is a shareholder. The value and distributions of equity and earnings from a company or financial asset are related to shares, which are units of ownership interest in those entities. There are certain guidelines and regulations that that apply to companies that wish to issue shares.
Although not mandatory, companies often issue shareholder agreements, which govern the relationship between directors and shareholders. These agreements set out the obligations, rights, and responsibilities of individuals or entities holding shares in a company. When disputes arise between shareholders and the directors, the shareholders’ agreement takes precedence- so it’s important to ensure that the agreements are comprehensive, and protective of both parties.
Minority vs Majority
A minority shareholder is an individual or entity that owns and controls less than 50% of a company’s issued shares. In certain circumstances, minority shareholders, when acting collectively, can hold a larger combined interest in a company. For example, three shareholders each holding 20% of the shares would collectively hold a greater interest than a single shareholder with 40%. However, disputes involving minority shareholders are more commonly associated with individuals owning less than 20% of a company’s shares.
A majority shareholder, or a group of shareholders acting collectively, typically owns a larger portion of the company and, as such, holds greater influence over its operations. This includes the authority to make significant decisions that may impact the company’s direction and future.
While minority shareholders do not have the ability to exert final controlling power over the company without owning a majority of its shares, they have specific legal rights. These rights include access to shareholder meetings, the ability to review the company’s records, the right to address directors during meetings, and the opportunity to communicate with other shareholders at these events.
Certain Protections
Shareholder agreements or the constitution of the company may grant existing shareholders the opportunity to buy additional shares when new ones are issues. This ensures that shareholders can maintain their percentage of ownership, protecting them from having their holdings diluted.
Despite being a minority shareholder, the individual or entity still has the right- under section 232 of the Corporations Act 2001 (Cth)- to apply to the court for a range of orders if the company actions are deemed to be oppressive, unfairly prejudicial, or unfairly discriminatory toward a shareholder or shareholders. If the issuance of shares results in the dilution of minority shareholders’ holdings without a legitimate reason for the company to raise equity capital, the court may determine that such conduct may be actionable under this provision. Such a determination depends on an objective evaluation of whether the disputed conduct is so unjust that reasonable directors, when weighing the matter, would not have considered it fair to make the decision. This involves weighing the company’s goals against the negative impact or burden it would impose on the shareholder(s).
The rights minority shareholders may be varied or cancelled following a specified procedure set out in a company’s constitution. In the absence of a constitution, variation or cancelling of those rights can be done through a special resolution by the company, passed at a meeting of members of the relevant class or with the written consent of members with at least 75 per cent of the votes in the class (section 246B).
Section 246D of the Corporations Act 2001 stipulates that if members of a class do not all agree (either through resolution or written consent) to a variation or cancellation of their rights, or to a change in the company’s constitution allowing such changes, then members holding at least 10% of the votes in that class can apply to the court to have the action overturned. The court may annul the change if it determines that it would be unfairly prejudicial to the applicants. As a result, minority shareholders are afforded some, though limited, protection regarding changes to the rights attached to their shares.
Tag and Drag Along Provisions
A well balanced clause that can be included within a shareholders agreement is a tag along provision. When implemented, if a shareholder wishes to sell their shares, they would generally need to bring notice to the other shareholders. Occassionally, majority shareholders, when selling shares to third parties and do not notify other share holders, here the tag along provision would allow minority shareholders to “tag along” with the majority shareholders and sell their shares for the same price and on the same terms and conditions.
You must also look out for drag along provisions within your shareholders agreement. A drag-along clause gives the majority shareholder(s) the right to force minority shareholder(s) to sell their shares, usually during an acquisition. For example, if a buyer wants to purchase the whole company and the majority shareholders, who own more than 50%, agree to sell, they can use the drag-along provision to require the minority shareholders to sell their shares too. This way, the buyer can take control of the entire company.
Rights against takeover bids for the company
Minority shareholders don’t have specific protections during a takeover bid, but there are some indirect safeguards they can rely on.
The Takeovers Panel can step in and declare certain actions by the company as “unacceptable” under Section 657A of the Corporations Act 2001. The Panel will consider how these actions might affect the control of the company or the acquisition of a significant interest. If the Panel agrees that the situation is unacceptable, it can make orders to protect the rights of those affected or to ensure the takeover proceeds as if the unacceptable circumstances hadn’t occurred.
For listed companies, or unlisted companies with more than 50 members, Section 661A(1) allows a bidder to compulsorily acquire shares in the target company if they own at least 90% of the shares in the relevant class, and at least 75% of the shares they offered to acquire. If these conditions aren’t met, the bidder can still apply to the court for permission to proceed with the compulsory acquisition (Section 661A(3)). Section 664A(1) also allows for a general compulsory acquisition right, even without a formal takeover bid, as long as the bidder holds 90% of the shares.
Minority shareholders do have some protection, in this case. The bidder must acquire shares on the same terms offered in the takeover bid (Section 661C). Shareholders can also go to court if they believe the offer isn’t fair, particularly if the price offered isn’t reasonable (Section 661E).
Finally, minority shareholders might also argue oppression under Section 232 if they believe the takeover is harmful to the interests of the company’s members or unfairly targets certain shareholders.
How do I know If I‘m being oppressed as a minority shareholder?
The law does not provide an exhaustive list of what constitutes minority shareholder oppression, but can be generally seen when a shareholder is subjected to unfair treatment or abuse of power by majority shareholders.
This is especially common in smaller companies, where minority shareholders may struggle to sell their shares or face disproportionately negative outcomes for doing so.
In many companies, majority shareholders hold significant control, often electing directors who align with their interests. This concentration of power can leave minority shareholders with little to no influence over the company’s decisions or direction.
To combat such oppression, courts recognise it as a serious legal issue. Section 232 of the Corporations Act 2001 (Cth) provides remedies for minority shareholders facing unfair or prejudicial treatment.
Common examples of oppressive conduct include:
- Fraudulent investments;
- Misuse of company funds;
- Exclusion from management decisions;
- Improper appointment or removal of directors;
- Restriction of dividends;
- Abuse of voting power;
- Denial of access to records;
- Misuse of board meetings;
- Using company funds to fight oppression claims; and
- Transactions favoring related parties.
Participating in Decision Making
The Corporations Act provides several avenues for minority shareholders to initiate a general meeting for passing resolutions.
Firstly, shareholders holding at least 5% of the voting rights at a general meeting can organise and conduct a meeting independently, covering the costs themselves (section 249F).
Shareholders who either represent 5% of eligible votes or makeup at least 100 voting members can additionally formally request the directors to arrange a general meeting under section 249D. Directors are obligated to act on such a request within 21 days. If they fail to comply, the requesting members—provided they collectively hold more than 50% of the votes among the petitioners—are empowered to organise and manage the meeting under section 249E.
If it is impractical to convene a meeting through standard processes, a voting member can seek a court’s intervention to authorize the meeting under section 249G. However, all meetings of a company’s members must serve a legitimate purpose (as stipulated by section 249Q), and any resolutions proposed must fall within the meeting’s constitutional authority.
When a Company is Experiencing Financial Difficulties
Under Section 462(2)(c), individuals holding fully paid shares, or those responsible for contributing assets to the company during liquidation, are eligible to request a court order for the company’s winding up. This option can be crucial for minority shareholders aiming to preserve their investments. A court may decide to liquidate a company for various reasons, such as:
- Directors prioritising their own interests over those of the shareholders collectively or engaging in conduct deemed unfair or unjust;
- The company’s operations being run in a way that harms, discriminates against, or disadvantages specific members, or goes against the broader interests of all shareholders;
- Actions, omissions, or decisions that negatively affect certain members or conflict with the company’s obligations to treat all members fairly;
- Findings by ASIC that the company is insolvent or that liquidation is necessary for the public, members, or creditors;
- Situations where the court determines that dissolving the company is reasonable and appropriate based on the circumstances.
Our Services
At OpenLegal, we understand that disputes between majority and minority shareholders can sometimes arise, creating significant challenges within a company. While some conflicts can be resolved amicably through mediation, others may escalate to the point where the working relationship becomes untenable, requiring more decisive action.
Navigating issues of shareholder oppression or unfair treatment can be legally and emotionally complex. These matters are often time-intensive and financially burdensome, particularly if they proceed to litigation.
At OpenLegal, we provide tailored support to businesses, directors, and shareholders in resolving such disputes- or strengthening your contracts to prevent them from occurring in the first place. Whether through alternative dispute resolution, strategic negotiation, or dedicated representation in court, we are committed to helping you achieve the best possible outcome for yourself as an individual, or a company.
Contact OpenLegal today at enquiries@openlegal.com.au or 1300 337 997 for a confidential consultation to discuss your situation and explore the best path forward.
Amirali Shojaei, Intern at OpenLegal
