Neglect minority shareholders at your peril

You create your own private company, you’re the majority shareholder and can vote your percentage any way you wish and you’re now omnipotent, able to pretty much have it all your own way, right?

Wrong – as many private companies, particularly family businesses where the siblings have fallen out, have found to their detriment.

That’s because when you create a company, you create another person independent of those who created the ‘person’, and it is your responsibility, when you choose to run your business as a corporation, to look after that ‘person’.
Furthermore, the minute you assume a position on that company’s board, you need to remove your shareholder hat, leave it at the door and take decisions in the best interest of the company. That doesn’t mean the decision you take can’t also be in the best interests of you as, say, the 51 per cent shareholder. Indeed, what suits the 51 per cent shareholder is often what is best for the company.

Often, but not 100 per cent of the time – and when decisions are taken that are patently unfair and disadvantage minority shareholders there is a section in the Corporations Act ready to come down hard on you.

It is called Oppression of the Minority and it allows the court, if it finds that the majority has been oppressing the minority, to take whatever action it deems right and proper. In extreme though not unheard of cases, the court has gone so far as to remove the entire board, place other people in the various portfolios and instruct them to behave themselves.

To provide greater insight into what constitutes oppression, here are but two examples…

A decision is taken at board level to issue shares to the board members to increase the share capital. But more shares are issued to those sympathetic to the majority shareholder in order to dilute the value of the shares of the dissenting minority.

Another recent case saw a private company board decide, on spurious grounds, not to pay dividends. Shortly thereafter, the board held a meeting where it was decided to increase management and director fees to a certain level…and this seemingly arbitrary level just happened to coincide with what would have been the profit paid to shareholders.

With no profit there is no dividend and in a private company, the minority shareholder cannot sell the shares. What’s more, the value has plummeted as there is no dividend on those shares – and the court deems that a squeeze out, which clearly constitutes oppression.

Furthermore, where the courts have found oppression, they won’t force people who cannot get along to remain in business together but they will instruct the majority shareholder to purchase the shares of the minority shareholder at the value they would have been worth prior to the oppression commencing.

And that, you will surely agree, is a stark reminder to neglect minority shareholders at your peril!

Until next time,

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