What is the difference between a majority and minority shareholder?

I myself and the vast majority of my blog readers are minorities. But this does not mean that we have no leverage at all over the companies in our portfolio. What kind of status is this, what rights does a minority shareholder have, what are the risks of violating them - let's figure it out.

Who are minority shareholders?

A minority shareholder is the owner of a small block of shares in a joint stock company (JSC). The number of securities for a minority shareholder is not constant: in small companies, the percentage of the total issue can be up to 5%, in the Gazprom, Rosneft or Sberbank holdings - hundredths of a percent of the issue.

A minority shareholder of a company has less power than a controlling or majority shareholder, but he has the following rights:

• Attend and vote at the general meeting of shareholders.
• Elect the Board of Directors of the company.
• Require any financial and business information, unless it contains state secrets.

• Receive dividends.
• Make inquiries to company management.
• Conclude transactions for the purchase and sale of his shares.

The minority level usually starts at 1% of the total voting securities, but in large holdings this percentage is lower. Another name for a minority stake is uncontrolled. In other words, the minority owner cannot influence the management, development of the enterprise, or the adoption of key decisions on strategic development.

Approximate structure of shareholders in a joint stock company

Minority owners in most cases expect a quick and high income. Traders often trade on stock exchanges and purchase growing securities in small volumes. If there is information about high dividends, this is also a reason to purchase a small package.

You can sell it in the future or monitor information on the market and in the company in order to take certain actions.

Minority shareholders are mainly engaged in speculative operations on stock exchanges, betting on a decrease or increase in the exchange rate. They are of little interest to the strategic issues of the enterprise - they are more interested in their own income.

Check out the terms and conditions of these brokers:

Minority shareholders can be individuals or legal entities, and the risk is limited to the property right of financial losses in the form of shares. Sometimes security holders may not receive any material resources in the event of a financial bubble in the form of a fraudulent or failed company. There are many such cases in the history of business.

Prominent examples are the 19th century French Panama Canal scam, where most shareholders went bankrupt, or the fall of Lehman Brothers and other bank and construction companies in 2008 in the United States.

Such cases often end in litigation against the management of the joint-stock company, but minority shareholders suffer the most; this helps them little. People still remember the Great Depression in the United States, when the shares of many companies turned into almost “candy wrappers.”

Rights of minority shareholders

However, even after the liquidation or bankruptcy of the enterprise, owners of small blocks of shares are entitled to the part of the enterprise's assets that have survived. In addition, the growth of securities quotations on the stock exchange brings the minority holder a passive permanent income that exceeds the interest on a bank deposit. Shares can be purchased on the stock exchange through a broker or off trading floors.

Expert opinion

Dmitry Dunyashev

Blogger, private investor, project manager real-investment.net

The situation for minority shareholders in Sberbank of the Russian Federation is indicative. Recently (2020) a transaction was made to transfer a controlling stake from the Bank of Russia to the Government of the Russian Federation. Minority shareholders, by and large, do not influence decision-making at shareholders' meetings.

However, holders of small packages were offered two options: an offer from Sberbank or a mutual voluntary agreement. The offer is not so profitable, so minority shareholders prefer to either keep their shares or negotiate on mutually beneficial terms with Sberbank. It is worth noting that Sberbank securities are very profitable in terms of dividends and stable growth of quotes, so minority shareholders are not in a particular hurry to part with these shares.

Dividends

The highest management body in a joint stock company is the general meeting of shareholders, where key development plans are adopted, the Board of Directors is elected, and the amount of dividends is established. Payments to co-owners depend on the amount of net profit for the reporting period.

Owners of large blocks of shares: controlling or majority, have a huge role in the amount of dividend payments. Their interests often diverge from minority shareholders, which will be discussed in more detail below. However, voting rights are based on the number of shares, so minority shareholders can influence the decision of the general meeting.

If a decision is made to pay dividends, small shareholders may decide to reinvest them. In this case, we are not talking about investing in enterprise projects, but about purchasing additional shares of the company. You must first calculate the possible income from investing in securities or investing in other projects.

For example, the largest taxpayer in Russia, Rosneft, regularly pays dividends, since among the co-owners, in addition to the state, there are many minority shareholders who need to be stimulated.

In addition, there are two more factors: stock exchange quotes are steadily growing, and the company itself is increasing its capitalization by acquiring new assets. In this case, it is more profitable for the minority shareholder to use the dividends received to purchase another number of voting securities of Rosneft PJSC.

Forced and obligatory repurchase of shares

A minority shareholder may lose his shares if the main owner has 95% of the equity securities of the enterprise. This is not a raider takeover or robbery, because often the minority shareholders themselves want to sell their securities, since this is often profitable.

Forced repurchase is not a completely correct and euphonious name, and means the repurchase of shares without the consent of their holders. This is a legal procedure and is provided for in the Federal Law on JSC in Article 84.8.

The procedure for forced redemption of shares in an open company can be schematically presented as follows:

The minority shareholder receives good money for his property rights, and the owner of 95% of the shares gets rid of several problems.

Advantages of forced repurchase:

1. Acceleration of management decisions under one owner. There will be no need to convene a general meeting of shareholders, notify everyone, spend money on sending out documents, or spend money on meetings. The speed of making strategic and tactical decisions increases by an order of magnitude.
2. There will be no need to take into account the interests of other shareholders, respond to their requests, or provide information.
3. The minority shareholder receives money for his shares at the market price.

Compulsory redemption is permitted only in public joint stock companies and only in voting securities. Preferred shares without voting rights are not redeemable. One shareholder does not have to own 95% of the securities; in total, their owners may be affiliated persons.

Who are the majority shareholders?

Majority shareholders are persons (individuals or legal entities) who largely influence decisions made at the general meeting of shareholders. Sometimes majority shareholders are confused with owners of a controlling stake - 50% + 1 share , but this fact is not far from the truth.

Here's why: if an organization's voting securities are quite widely dispersed among holders, then 20 to 40% of the shares are sufficient to make key decisions. Often majority shareholders have a blocking stake.

The majority shareholder is an individual

The majority shareholder is the state

Rights of majority shareholders:

• Influence on the strategic and tactical development of the enterprise.
• A significant voice in determining dividends for the current period.
• Representation on the Board of Directors by one or more persons.

• Request for any financial, economic, operational, technological, production documents.
• Blocking some strategic issues of the company with a sufficient number of votes (usually 25% + 1 vote).
• Representation on the Audit Commission.

The amount of power of the majority shareholder depends on the number of voting securities in his possession.

Sources of preference formation

The main source of advantage for majority shareholders is the number of shares they own.

Sometimes in a company no one person has a controlling interest, so voting becomes a majority system, just like in politics. The main sources of preferences of majority shareholders:

• A large block of shares allows you to directly influence the Board of Directors and the General Director. Various methods are used here, including sabotage and blackmail, but these are extreme options.
• A small number of participants at the shareholders' meeting allows the majority shareholder to become the owner of a controlling stake, appoint his own management, and promote his plans for the company's development.

• Typically, owners of large stakes, especially in Russian companies, are technologically advanced companies, which additionally adds an advantage when making decisions.
• Majority shareholders are committed to the company's development prospects, because they usually invest in it for the long term.

Holders of large volumes of securities always significantly influence the general policy of a joint stock company.

Dividends

Majority shareholders usually prefer to reinvest dividends in securities of the same company in order to increase their weight and influence in management and politics. Most often, majority shareholders look at the future, draw up multi-year business plans, and therefore advocate the abolition or reduction of dividend payments.

So, in 2022, RUSAL-Bratsk acted, completely refusing to pay dividends, despite the huge profits. All freed up money is used to modernize, improve infrastructure, and increase social guarantees for workers.

What does the law say?

To prevent such situations and improve the relationship between these two types of shareholders, a number of countries have laws that define the rights of non-managing shareholders. For example, the federal legislation of the Russian Federation contains rules that protect small shareholders. First of all, this is the preservation in their favor of an independent status in the event of an acquisition or merger of companies. Indeed, due to these processes, the minority shareholder may lose, since its share in the new structure will most likely be reduced, which will also lead to a decrease in its level of influence on the bodies managing the company.

Differences between majority and minority shareholders

There are two types of minority shareholders, whose tasks are the same:

1. Small portfolio investors who keep money in what they believe are profitable stocks for many years. Typically, these are the so-called “blue chips”: Gazprom, Rosneft, Lukoil, Avisma, Novatek, Rostselmash, Severstal and other strong companies that show annual growth in quotations.
2. Stock speculators who make money from differences in stock prices over time. This type of trading is riskier.

Majority shareholders, unlike minority shareholders, follow the following rules:

• They invest large sums in a joint stock company.
• Take an active part in the strategic and tactical planning of the company.

• Calculate profit from investments over a long period.
• They prefer to pay less dividends to shareholders and invest in the development of the enterprise.

Majority shareholders differ significantly from minority shareholders in their approach to the policy of a joint stock company, especially in terms of dividends.

Size of shares and their weight

There are two approaches to who should be classified as minority shareholders. Some classify as minority shareholders those who own less than 50% of the shares. This is more relevant for our legal order, since in Russia most of the authorized capital is concentrated, as a rule, in one majority shareholder.

The second approach is found in legal orders with a dispersed ownership system, where there are a lot of shareholders. For example, almost 100% of McDonald's Corporation shares are publicly traded. With this ownership structure, the majority shareholder may become the owner of 20-30% of the shares, because the remaining shares are distributed among too many minority shareholders, who find it difficult to agree on a common decision.

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