Minority shareholder

What it means

A minority shareholder is a shareholder without a majority of votes at the general meeting, who therefore cannot push decisions through alone. Ordinary matters such as the distribution of profit or electing the director are decided by a majority, and amending the articles usually by two thirds.

The law nevertheless gives them protective rights. They may inspect company documents, request information, with a sufficient stake demand that a general meeting be called, challenge its resolutions in court and sue the director for damages on the company’s behalf.

The extent of influence depends on the stake. With more than a third of the votes a shareholder can block decisions requiring a two-thirds majority, such as amending the articles of association. Similar rules apply to shareholders in a joint-stock company.

How it works in practice

When a minority shareholder such as an investor or key manager comes in, we prepare a shareholders’ agreement giving protection beyond the law: a veto on fundamental matters, information rights, tag-along and a pre-emption right.

A minority shareholder often has no say over dividends, because the majority can keep profits in the company for years. If they want to leave, the price of the stake has to be set by a business valuation, and without an agreement the dispute is hard to resolve.

In exercising their rights a minority shareholder also relies on public data such as the accounts in the collection of deeds and the register of financial statements. As the company’s accountants we provide shareholders with the information they are entitled to, always through the director.

What to watch out for

A majority shareholder may not abuse its vote to the minority’s detriment, for example by approving overpriced services from its own company. A court can annul such a resolution, and a director who carries it out risks liability for damages.

A minority stake is hard to sell. The buyer gains no control and in an s. r. o. the other shareholders often have pre-emption rights, so the market price of a minority stake is usually below its pro rata share of the company’s value. On entering a company it pays to plan the exit too and set it out in a contract.