Russian corporate legislation, in particular the Law “On Joint Stock Companies”, pays special attention to such an aspect as the protection of the rights of minority shareholders. The history of many companies is associated with infringement of their rights. The legislative and judicial practice make every effort to ensure that the protection of the rights of minority shareholders is carried out unconditionally and in accordance with fundamental international principles. We should not forget that there are foreign investors among minority shareholders. Protection of the rights of minority shareholders is, among other things, a tool for improving the investment climate in the country.
Who are the minority shareholders? What rights and obligations do minority shareholders have? How do they participate in the management of the company?
Consolidation of company shares leads to the displacement of minority shareholders. In order to understand the essence of this phenomenon, you need to know who the minority and majority shareholders are.
Russian legislation does not define this term, it is more common in corporate governance practice and in topics related to investing.
A minority shareholder is any owner of shares whose stake is less than the controlling one, that is, less than 50% + 1 voting share of the company.
This type of securities holders has certain rights to manage the joint-stock company, but they are closely related to the size of its package:
- If he is blocking – 25% of voting shares – he can block a number of decisions of the general meeting, including an increase in the authorized capital, which can dilute the percentage of his participation.
- The owner of 10% of the voting shares may request an extraordinary general meeting.
- 2% give the right to include issues on the agenda of the meeting and to nominate their candidates to the board of directors.
- Any number of shares makes it possible to request documents and information about the activities of the joint-stock company, but accounting documents will be provided only to the owner of 25% of the shares, this allows you to keep a trade secret and guarantees the protection of the company from abuse.
If a minority shareholder does not agree with the majority of votes when making decisions by the general meeting, they can challenge them in court.
The legislator also provided for the possibility to demand the redemption of shares by the company in case of voting against any issues on the agenda of the meeting.
Minority and majority shareholders — differences
It is not always necessary to have a controlling stake in order to be considered a majority owner. In large joint-stock companies, the authorized capital of which is dispersed among hundreds of thousands of persons whose shares are traded on the stock exchange, for example, Gazprom, the majority shareholder will be the owner of the shares who managed to consolidate even 15%.
This already makes it possible to influence decision-making and form the Board of Directors. Which ensures the protection of the rights of minority shareholders, including the rights to participate in management..
The minority shareholder practically does not participate in the management of the company. However, the minimum number of members of the Board of Directors (BOD) by law is seven. Therefore, having already collected 15%, the Manoritarian can spend 1-2 people in the SD and take part in the work of the JSC.
Protection of the rights of minority shareholders — how are the rights of minority shareholders protected?
A classic case of violation of the rights of minority shareholders can be found in the criminal chronicle. For example, in the Yukos case.
Majoritaries have been selling the company’s products at low prices for a long time, accumulating profits offshore and dividing it among themselves. Simultaneously, the owners of small packages received extremely low dividends, significantly less than those they could count on if their rights were respected.
This case is indicative, but not the only one. The protection of the rights of minority shareholders is inseparable from the restriction of the rights of majority shareholders at the legislative level.
Other cases of demonstrative violation of rights:
- Sale of real estate and other assets of the company at non-market value.
- Withdrawal of profit.
- Obtaining a loan, withdrawing it with cashing out and subsequent bankruptcy.
- Increase in the authorized capital with dilution of the minority interest.
In the first and second cases, it partially protects the procedure for making decisions on large transactions (more than 50% of the value of the company’s property), but it must be understood that they can only be blocked by having a blocking (25%) package.
In order to guarantee protection, the legislator introduced such a tool as the purchase of shares from minority shareholders. Its essence is that, having acquired a substantial stake in the company, the buyer is obliged to offer to buy their shares from minority shareholders at market value.
There are several percentage thresholds at which there is a need for redemption. It can be either voluntary or compulsory. In this case, the protection of the rights of minority shareholders is ensured by their right to receive a fair price for their stake and not to depend in the future on incorrect decisions of the main shareholder and the top management formed by him.
Any person who has managed to buy more than 30% of the shares of a joint-stock company or acquire them in another way (as a gift, by inheritance, when contributing to the authorized capital or when merging and joining companies) is obliged to send the remaining shareholders an offer to buy back shares.
At the same time, the ownership of the package may not be directly, but through affiliated persons. This does not exempt from the need for a ransom.
The shareholder is obliged to make such an offer not once, but in all cases when his share reaches 30%, 50% or 75%.
The purchase price is always determined on the basis of a market valuation conducted by an independent appraiser. This helps to protect the financial interests of minority shareholders.
It is obvious that the multiplicity of forms of violations and the complexity of protection tools require the mandatory involvement of a qualified lawyer who will help build a defense strategy.
Studying the legislation, duties, rights and responsibilities of minority shareholders, it is necessary to pay attention not only to the Law on the Joint-Stock Company. Also to the still-in-force resolutions of the Federal Financial Markets Service (FFMS) in force in relation to the Joint-Stock Company, to judicial practice, to the rules governing the work of registrars and depositories.
Forced repurchase of shares by majority shareholder from minority shareholders
As already mentioned above, the majority owner is obliged to offer to buy out the shares of minority shareholders in certain cases, and they have the right to agree or not. Usually it depends on the market valuation, the size of the package, and the investment strategy.
However, there is one situation when the buyout takes place regardless of the intention and desire of the owner of the shares.
If it was possible to consolidate more than 95% of the shares, the remaining ones can be purchased in a simplified manner, without waiting for consent. The repurchase of shares from minority shareholders is automatic. There are no mechanisms that would allow avoiding this procedure.
Example of forced share repurchase
A vivid illustration of this practice was the situation when Alliance Rostec Auto B. V., affiliated with Rostec state corporations, acquired 13.1% of Avtovaz shares on the stock exchange.
After that, the value of its stake exceeded the limit of 95% and amounted to 96.64% of shares. A forced ransom was announced. The owners of Avtovaz shares once simply did not see them on their accounts.
At the same time, their finances, which are on brokerage accounts, have been replenished. It is impossible to protect yourself from this, but it should be remembered that the norm applies only to public companies whose shares are bought and sold freely on the open market.
The valuation of shares to determine the repurchase price is carried out by an independent appraiser, then the requirement is considered by the Central Bank of the Russian Federation to determine its legality and, after obtaining consent, appropriate orders are given to the registrar and depositories.
Protection of the rights of minority shareholders — risks and guarantees
When purchasing a package in a public joint stock company, regardless of its size, you need to be prepared for risks.
Main environments:
- non-receipt or non-receipt of dividends;
- decrease in the capitalization of shares, the value of the package due to poor-quality management work to the detriment of society;
- dilution of the share of participation;
- bankruptcy or liquidation with loss of shares.
Ways to protect minority shareholders
Ways to protect minority shareholders largely depend on their prudent behavior. When purchasing a small package, you need to pay attention to the existing structure of owners:
- top management;
- features of corporate behavior;
- transparency of management.
It is necessary to check how fully in compliance with the legislation:
- information about the company’s activities is disclosed;
- whether annual reports, information about affiliated persons and material facts are published in the public domain.
It will be a big plus if the company has adopted a “Code of Corporate Conduct” that excludes abuse. Those companies whose shares were taken out for IPO and which have a lot of foreign investors, usually do not abuse.
Minority shareholders of the company – investors can be recommended to pay attention to those joint-stock companies that have long had the practice of working in the public space.
Guarantees of rights will be not only the law and judicial protection. Many people use such a tool as the media. Publication of information about incorrect behavior can seriously undermine the company’s business reputation, reduce the capitalization of shares, and lead to mass sales of shares by foreign holders.
The combination of prudence with the opportunities provided by law to protect the share of minority shareholders should eliminate most of the risks.
The emergence of conflicts between minority and majority shareholders and their consequences
Conflicts between shareholders often complicate the company’s work. Many are familiar with the concept of “greenmail”, when the owner of a small package of absolutely legitimate actions – requesting documents, convening meetings practically blocks the normal work of the society.
Usually the conflict gets to the court. Explanations of the Armed Forces of the Russian Federation are being created on its basis. But it is not always the decision to cancel the decision of the meeting or invalidate the transaction that leads to a successful outcome. The dispute is often transferred to foreign courts.
As a result, disputes are often resolved not in court, but through agreements when one of the parties to the dispute buys shares of minority shareholders. This way of resolution is especially often used when two large companies are involved in a conflict.
Examples of protection of the rights of minority shareholders
In Russia, the rights of minority shareholders are protected by the legislator, the court and law enforcement agencies. It is not always successful, but as the awareness of the management of companies increases, violations of rights become more and more rare.
Examples of protecting the rights of minority shareholders are well known. You can recall how in 2008 Dmitry Mazepin’s company Uralchem acquired 10% of the shares of Tolyattiazot.
The minority shareholder immediately began to realize the full range of rights granted to him by law, to demand documents, to file lawsuits in court.
Soon the conflict turned into a criminal plan, criminal cases were opened against the director of Tolyattiazot related to the sale of products at low prices, and the director fled abroad.
As a result of a long shareholder war in 2020, the arbitration court decided to pay Uralchem 10 billion rubles as a minority shareholder, but the conflict has not been settled to date.
The second most important and well-known conflict in which the rights of minority shareholders were protected was the dispute over the shares of JSC Lenin State Farm, whose majority shareholder is former presidential candidate Pavel Grudinin.
The Arbitration Court, as a result of a long consideration of a number of cases, decided to satisfy the interests of minority shareholders and about 42% of the shares changed hands.
Both of these cases are indicative, they force us to pay attention to the requirements for highly qualified specialists accompanying conflicts.
Protecting the rights of minority shareholders is a complex task that is solved jointly by the legislator and qualified consultants. However, you can minimize the risks at the very beginning by choosing the right investment strategy.
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