How to effectively protect the minority? What rights do minority shareholders have? How can they effectively assert these rights?
The importance of the balance between minority and majority
In companies where both majority and minority shareholders are present, potential conflicts may arise. The majority typically holds decisive voting power, while the minority may find itself at a disadvantage. Ensuring the protection of the rights of minority shareholders is therefore essential—not only for fair company functioning but also to prevent abuse of power.
Rights of (not only) minority shareholders
1. Share in voting rights:
A share in voting rights is one of the basic non-property rights of a shareholder. The share in voting rights may be either (i) equal, where the number of votes depends on the shareholder's contribution, (ii) unequal, where different types of shares or ownership interests may be issued with different numbers of votes attached, or (iii) there may even be shares or ownership interests without voting rights. A well-designed structure helps prevent deadlock situations and positively influences the functioning of the company and the relationships among shareholders. The regulation is relatively flexible and allows for reflecting various business agreements among shareholders regarding the structure of voting rights within the company.
2. Right to information:
Shareholders (including minority ones) of a limited liability company have the right to access information about the company’s financial performance and governance. Specifically, they have the right to request information from the managing directors, inspect company documents, and verify the data contained in those documents. This right enables minority shareholders to better monitor the company’s activities and protect their interests.
On the other hand, shareholders of a joint stock company have significantly more limited rights—they only have a right to request explanations concerning matters related to the company or entities it controls, and only if such explanations are necessary to assess the content of items included on the general meeting agenda or to exercise their shareholder rights at the meeting. However, this right can be extended to more closely resemble the rules applicable to limited liability companies. Such an extended right to information can be granted either to all shareholders or only to selected ones by creating a special class of shares (so-called Information Shares) through appropriate amendments to the articles of association of the joint stock company.
3. The right to a share in profits:
Unless special classes of ownership interests or shares without a right to a share in profits are established in the memorandum of association or the articles of association, it generally applies that shareholders have the right to participate in the company’s profits, proportionally to the amount of their shares or ownership interests.
By creating special classes of ownership interests or shares, these rules can be modified—for example, a share in profits can be set unevenly, or shares/ownership interests may be issued without any right to a share in profits. As in the case of a share in voting rights, the forming juridical act can reflect diverse agreements among shareholders.
4. The right to convene a general meeting:
Under certain conditions, minority (qualified) shareholders may initiate the convening of a general meeting to discuss matters they propose.
This right can serve as a powerful tool for minority shareholders to discuss matters they consider important.
5. The right to judicial protection:
If minority shareholders feel harmed, they have the right to turn to the courts and seek redress—for example, in cases where voting rights are abused to the detriment of the company as a whole.
Judicial protection is an important safeguard through which the affected shareholder can seek justice in such extreme cases.
Mechanisms to protect minority shareholders
1. Cumulative voting:
This mechanism makes it easier for minority shareholders to gain representation in the company’s bodies and thereby influence its governance and operations. Cumulative voting is often used when filling positions in both statutory and supervisory bodies.
2. Veto right:
In certain, especially key matters—such as amendments to the forming juridical act or the transfer of a substantial part of the company’s assets—minority shareholders may be granted a veto right.
This right gives minority shareholders the option to block decisions that could significantly harm their interests.
Even without an explicitly agreed veto right, it still applies that if an amendment to the memorandum of association infringes upon the rights of shareholders, the consent of those whose rights are being infringed is always required.
3. Pre-emption right:
Agreeing on a pre-emption right allows entitled shareholders to purchase an ownership interest or shares that another shareholder intends to sell to a third party.
This mechanism helps maintain a stable ownership structure and protects minority (as well as majority) shareholders from unwanted changes.
In addition to the above, other mechanisms for protecting minority shareholders may also be established through a shareholders’ agreement, or through the memorandum of association or the articles of association.
Risks associated with insufficient protection of minority shareholders
1. Abuse of majority voting:
Majority shareholders may push through decisions that conflict with the interests of minority shareholders—for example, a decision to increase the share capital, which the minority may not be able to finance.
Such situations can weaken the position of minority shareholders or lead to their complete squeeze-out.
2. Exclusion from the decision-making process:
Failure to agree on appropriate protective mechanisms may result in minority shareholders being effectively excluded from decision-making on important company matters, which can negatively impact their trust in relation to the company.
3. Reduction in the value of ownership interests or shares:
If the majority adopts decisions that negatively affect the company’s value, this can directly impact the value of the minority shareholders’ ownership interests or shares.
A reduction in the value of ownership interests or shares can lead to financial losses for minority shareholders.
Practical steps to protect minority shareholders
1. Incorporating protective measures into a shareholders’ agreement, or into the forming juridical act:
The rights and protection mechanisms for minority shareholders should be clearly defined and enforceable.
Emphasis should be placed on specific provisions that protect minority shareholders from abuse of majority power.
2. Using expert advice:
Law firms and other professionals can assist in designing and implementing measures that minimize the risk of majority power abuse.
Expert advice typically includes the drafting of specific contractual provisions.
3. Regular monitoring:
Minority shareholders should regularly monitor the company’s activities and actively exercise their rights to information/explanation.
Monitoring enables the early identification of potential issues and their timely resolution.
Case studies
1. Successful implementation of a veto right:
In a financial services company, a minority shareholder was protected by a veto right that prevented the majority shareholder from transferring key assets to another company without consent.
This protection ensured the company’s stability and safeguarded the minority shareholder’s interests.
2. Judicial protection:
Minority shareholders of an industrial firm successfully challenged a general meeting decision that would have effectively excluded them from the decision-making process.
The court ruling restored balance among shareholders and ensured fair company functioning.
Conclusion
Protecting minority shareholders is essential for fair company functioning and for preventing conflicts among shareholders. Properly designed mechanisms and open communication contribute to building trust and long-term company stability.
At HAVEL & PARTNERS, we have extensive experience in setting up rules and mechanisms to protect minority shareholders. We are happy to help you create an environment that reflects the needs of all involved parties and ensures harmonious cooperation
