Minority Protection in Joint Ventures and Investments
If you are involved in a joint venture company, or with capital investors, you may well have to take into account the interests of substantial minority shareholders, who are not willing to allow the unrestricted power of the controlling majority.
A minority shareholder in such a situation may wish to obtain certain protection in a shareholders' agreement. This protection may include:
- The right to appoint one or more directors
- A veto on matters affecting the value of his shares
- A minimum dividend
- Restrictions on share transfers
- And pre-emption rights on new share issues.
Minority shareholders may seek to impose an obligation on the directors that they provide regular reports on the business. Shareholders rights to such information are otherwise rather limited.
It makes sense to establish in advance those matters requiring minority shareholder approval and the procedure that must be followed if approval is not forthcoming.
The minority shareholder may also seek to impose a requirement that any person buying a controlling interest in the company should offer to buy his minority shareholding at the same price and/or he may demand a mechanism to resolve deadlock by requiring the majority shareholders to buy out the minority shareholders (or vice versa).
Such matters can be dealt with by a shareholders' agreement or by the Articles of Association. The Articles of Association have the advantage of binding the directors rather than just the parties to the shareholders' agreement.
The disadvantage of using the Articles of Association is that they are open to public scrutiny whereas a shareholders' agreement is a private document.