- September 20, 2018
- Terms
- Liliya Ponomareva
One of the principles of modern business is transparency. For this purpose, special supervisory authorities are involved, which closely monitor the details of concluded transactions and give consent to the sale of large blocks of shares. As required by law, all persons holding shares in a public joint stock company must be known. To implement this requirement, lists of shareholders are posted on the company’s open resources. This allows the public to understand exactly who influences the policies of a particular organization.
Basic Concepts
A shareholder is an individual or legal entity who is the owner of a block of shares in a company. Shareholders are outside the structure of the company itself, and their liability is limited to transactions with securities.
The main governing body of a joint stock company is the general meeting of shareholders. The meeting is dedicated to strategic decisions on the further direction of development and distribution of profits.
Shareholders who participate in the general meeting and have the right to vote on important issues are majority shareholders and minority shareholders.
What is this concept of majority shareholder?
Majoritarian or majorité in French is translated as majority. The owner of a share in the authorized capital of an institution with a similar title is the owner of a large block of securities. Can be an individual or legal entity.
Majority shareholders have access to the reins of the companies in which they are investors. Majority shareholders can take part in voting and also have a direct influence on the adoption of important decisions.
Majority shareholders usually hold varying numbers of shares. The exact size of the package usually depends on specific cases and the distribution of shares among other participants in the enterprise.
The lower limit for the number of securities is a certain percentage that guarantees active rights. A stock portfolio that includes half of a company's total stock fund is called a control portfolio. It provides the owner with virtually unlimited leadership options.
Shareholders with weight
A majority shareholder is the owner of such a block of shares in a company that allows him to influence decisions made by the general meeting.
Controlling shares are most often in the hands of the founders; investors can also have a significant share. To determine the amount of investment that allows you to obtain the status of a majority shareholder, it is necessary to find information on the total volume of shares issued. Having found out the market value of the complete package, you can determine the size of the required investment, which should be at least five percent of the total amount. The company's Articles of Association may specify a threshold for recognition of owner status. The majority owner is not just a shareholder; his will will adjust the development of the company.
The majority shareholder is a person who already has a high financial position. The purpose of his participation in the business is related to dividends, but this is not the emphasis. Their main interest is related to business expansion and rising share prices. They are willing to wait a few years and not take away dividend income in order to bring the company to a level above its competitors, making a profit through business growth.
Differences between majority and minority shareholders
There are two types of minority shareholders, whose tasks are the same:
- 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.
- 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.
Minority shareholders
Minority shareholders have a very small share of the shares and their vote cannot be decisive. However, a situation may arise in which all minority shareholders support a certain side, in which case their combined weight can play a significant role. The size of the minority shareholder's shares is less than five percent of the entire package.
As a rule, there are two groups among these shareholders. The first are private investors interested in receiving high dividends. The second group consists of securities market speculators, whose interest boils down to differences in stock prices.
Definition: minority shareholder and majority shareholder in simple words
Minority shareholders (from the French “minoritaire” - “insignificant, non-controlling”) are shareholders who own small blocks of shares. The size is limited to no more than 5% of all shares. Sometimes they are also called “small shareholders.”
Majority shareholders (from the French “Majoritaire” - “main, main”) are large shareholders who own an impressive part of the company’s shares. It is impossible to say the exact number of shares owned that is required to be considered a majority shareholder. Most often it is about 20% or more.
The majority shareholder most often acts as a very wealthy investor or fund. These could be mutual funds, hedge funds. They are also called institutional investors.
What are the differences
The main difference between a minority shareholder and a majority shareholder is the different goals. Small shareholders are interested in making quick money. They can get it through high dividends or speculation on the stock market. Large shareholders are interested in the long-term growth of the company, they do not care about short-term benefits.
Different goals are the main struggle between the minority shareholder and the majority shareholder.
The formula for calculating the required number of shares for candidates to the board of directors:
S = (V x P) : (D + 1) + 1
Where:
- S (Shares) — required number of shares;
- V (Voting) — number of voting shares;
- P (Positions) — the desired number of seats on the board of directors;
- D (Directors) — total number of seats on the board of directors;
Minority rights
At first glance, the rights of minority shareholders are infringed, but these relations are regulated by law. A shareholder with a small share of shares has the right to demand the redemption of his shares at the market price if he does not agree with the policies of the management team. Moreover, when owning shares of at least one percent, the shareholder has the right to bring a claim from a group of shareholders regarding inappropriate actions of management structures.
When participating in voting, a shareholder has the right to an independent vote or cumulative voting, when his vote is transferred during the procedure to another shareholder.
Such rules of the game allow minority shareholders to join larger owners on favorable terms. In this situation, by helping another player have more voting power, the minority shareholder can be confident that his interests are being respected.
Often, the rights of minority shareholders are infringed, especially if there is a desire of the majority owner to consolidate 100 percent of the shares in his hands.
Who are the majority shareholders?
The term is not in official legislation. This concept is used in business practice. In essence, a person with the rights of a majority shareholder owns the largest percentage of the package of a single JSC and has the opportunity to exert the greatest influence on the management of the company.
The owner of a controlling stake has the right to individually make decisions on the functioning of the organization. The majority shareholder's vote outweighs the votes of other shareholders.
The majority shareholder is
However, there is no clear definition of how many shares a majority shareholder must own. Of key importance is the ability to lobby decisions on certain issues in one’s favor and to directly influence the management of the joint-stock company.
The majority participant of a JSC can be an individual, a legal entity or a group of companies.
Meeting of shareholders
The annual general meeting of shareholders is mandatory by law. The initiator of the meeting is the board of directors of the joint-stock company.
In some cases, the initiator may be a shareholder entitled to two or more percent of voting shares in the company's authorized capital. Thus, convening and holding a general meeting by the majority shareholder is a common practice provided for by law. But the Charter of a particular organization may have its own rules, so you should take them into account. This document specifies the official who sets the date and time for the meeting.
The meeting is announced indicating the date, time, list of participating shareholders and agenda. The notice of the event is posted on the company’s open resources. An interesting rule is that items not included on the agenda are not eligible for consideration.
Greenmail in bankruptcy - protection from the arbitrariness of majority shareholders or extortion?
The concepts of greenmail and bankruptcy, at first glance, are incompatible. Techniques of corporate blackmail (greenmail) are usually applied, in fact, to corporate relations related to the ownership of shares and shares. In bankruptcy proceedings, corporate bodies lose their weight and management passes into the hands of creditors.
However, it must be admitted that the system of managing a debtor (legal entity) in bankruptcy (mainly in a competition, of course) generally repeats the corporate structure and its key principle of subordination of the minority to the majority. Moreover, in bankruptcy proceedings (competition), the actual head of the debtor - the bankruptcy trustee - has much more rights and is much more “stable” than the usual head of a legal entity.
A dominant creditor or a consolidated group of such creditors in bankruptcy, having approved a loyal manager, can decide the most significant issues of the procedure, essentially predetermining its outcome for the entire community of creditors.
The inequality of the position and capabilities of persons participating in the capital of a company or the register of debts of a debtor in the event of bankruptcy is the ideological and practical basis for greenmail of any kind (corporate or bankrupt).
Classic corporate greenmail can (conditionally, of course) be divided into two types. The first is an obvious abuse on the part of a minority shareholder and is aimed at obtaining an inflated value of a corporate asset (stocks, interests) through various forms of sabotage of the normal activities of a legal entity. The second is of a relatively conscientious and forced nature (a kind of abuse of the minority shareholder against the dishonest behavior of the majority shareholders). The point of this option is to obtain the actual value of a corporate asset in the conditions of its artificial undervaluation as a result of the actions of controlling persons (the use of intermediary structures, foreign loans, licensing agreements, etc., etc.) I wrote about this method of corporate blackmail at one time here same on the “law”
I believe that in bankruptcy procedures there are the same options for greenmail: (a) abuse and (b) the fight for one’s legitimate property interest, a certain form of self-defense of the right.
For the purposes of this post, I will focus on “bona fide” blackmail.
Bankruptcy greenmail as protection of the interests of a minority creditor
Bankruptcy blackmail is aimed at obtaining satisfaction of one’s claims in one of two ways: repayment of the debtor’s registered obligation at the expense of the bankruptcy estate or redemption of the claim by the dominant creditor (this method is preferable).
Among the reasons that may force a minority creditor to resort to bankruptcy greenmail measures, the main two are: (a) unfair actions of the dominant creditor and/or bankruptcy trustee and (b) the lack of legal mechanisms to overcome disagreements between majority and minority creditors.
As for the dishonest actions of the majority shareholders and the manager, here the minority shareholders in the bankruptcy procedure must be confronted by the interests of several “powerful” groups at once:
(a) Majority Creditors. Actually, their interest (like the interest of any creditor) comes down to the maximum repayment of claims. However, in conditions of negative assets of the debtor and competition with other creditors, they, as a rule, cannot receive significant satisfaction. In this regard, this group is looking for other ways to compensate for their interests through the use of control over the procedure. Here and further I will not talk about specific forms and patterns of abuse - this is a separate story.
(b) Beneficiaries of the debtor (this group may sometimes coincide with the first). Beneficiaries (if they are not creditors) have the goal, first of all, to protect themselves from the troubles associated with the bankruptcy procedure - challenging optimization transactions made on the eve of bankruptcy and burdensome subsidiary liability.
(c) Interests in relation to the debtor’s property (this group may coincide with the first and second). These guys have a targeted interest - a specific property pool of the debtor, which they plan to purchase (using the specifics of the bankruptcy procedure) at a price significantly lower than the market.
Even a cursory glance at the claims of groups competing with minority creditors (mentioned above) allows us to conclude that their interests lead to minimizing the minority shareholder’s chances of repaying its claims at the expense of the bankruptcy estate.
In conditions of “fair” competition with these groups, the minority shareholder will always lose and lose the right to repay their claims. The only thing that can change the situation is going on the warpath, that is, using the mechanism of bankruptcy blackmail.
The second reason I indicated for bankruptcy greenmail is the lack of mechanisms capable of resolving the opposing interests of the majority and minority creditor. Here, to understand such mechanisms, it would be appropriate to make reference to corporate law and to similar cases of conflict between minority and majority shareholders (participants).
The current corporate legislation of the Russian Federation has gone through a long and thorny path of development and has ultimately developed mechanisms that allow large and small shareholders (participants) to resolve the contradictions that have arisen without resorting to open conflict (including the same corporate blackmail).
These methods include: the obligation of a shareholder (owning more than 30% of voting shares in a PJSC) to contact other shareholders with an offer to buy out their shares; repurchase of shares by the company from minority shareholders in the event of amendments to the charter, approval of a major transaction and an interested party transaction, change in the status of the company; the right to withdraw from the membership with payment of the actual value of the share, etc.
The meaning of the above institutions of corporate law comes down to recognition at the legislative level that majority control over a corporation can lead to abuses on the part of the controlling group; in this regard, minority shareholders are given the right, before an alleged violation of their rights, to get rid of shares (shares) of the company by transferring their controlling majoritarians or society itself.
The absence of similar institutions in the bankruptcy legislation system leaves no chance for a minority creditor to repay his claims and forces him to look for mechanisms for aggressive protection of rights (that same bankruptcy blackmail).
All of the above can be illustrated with examples from arbitration practice, including acts of the Supreme Court, but this is a broad topic for a separate publication. Now let me make a few conclusions regarding bankruptcy blackmail on the part of minority creditors in the current conditions:
1) Today, minority creditors in bankruptcy proceedings do not have an effective mechanism for protecting property interests that would allow, without resorting to conflict, to obtain at least partial satisfaction of claims against the debtor;
2) Bona fide bankruptcy blackmail, understood as the identification of violations during the procedure (aimed at ensuring the interests of majority creditors and other interested parties), is the only means of ensuring the interests of a minority shareholder in the bankruptcy procedure. Refusal of this instrument leads to the impossibility of repaying the claims against the debtor;
3) At the same time, not every lawyer can identify the above-mentioned facts of “incorrect” conduct of the procedure - only an experienced specialist in the field of supporting bankruptcy procedures, and this raises the cost of this type of service to a high and often unacceptable level for minority shareholders. Hence the extremely low activity of minority creditors in bankruptcy proceedings - usually they doomedly watch the departing train, without multiplying their losses by the amount of legal expenses. Collectors are also not very active in relation to registered debts - since working them off is a costly long game with a difficult to predict result.
4) An acceptable way out of the situation with the deplorable situation of minority creditors could be the following actions:
a) balancing the rights and procedural capabilities of minority and majority creditors, in the form of a mechanism for the redemption of minority claims by majority shareholders (of course with a significant discount) or a radical expansion of the rights of minority creditors in the procedure (in matters of appointing a manager, challenging transactions, the amount of information provided, etc. . and so on.). Relevant corporate decisions can be taken as a basis;
b) formation of a market for registered debts. The point is to create conditions of interaction, information banks, specialized platforms, etc. that are acceptable for copyright holders (minority creditors) and collection organizations. and so on.
Convening a general meeting
The initiators of convening a general meeting of shareholders according to the law are:
- Board of Directors;
- audit committee;
- auditor;
- shareholders who have a sufficient share of shares.
However, the decision to hold a meeting remains with the person specified in the Charter of the joint-stock company.
By law, in the absence of an annual meeting, a shareholder has the right to file a lawsuit demanding its organization.
What rights do majority shareholders have?
In addition to making important decisions for society, the legal property rights of majority shareholders include:
- participation in profit distribution;
- the right to receive a share of ownership or value upon the sale or liquidation of a JSC (regulated by clause 1 of Article 67 of the Civil Code of the Russian Federation);
- powers to purchase new or sell, donate, exchange shares.
Thanks to control over the company, the majority shareholder, in addition to dividends, receives additional benefits. For ordinary shareholders, dividend profit comes from the net income of the joint-stock company. For majority shareholders, income comes from balance sheet profit upon receipt of trade markups included in the cost of production of supplier companies.
