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Majority rules, minority rights

Bryce Sanders

Then they sell. If they feel the company is asset-rich and undervalued they buy and wait, confident a large outside investor will eventually take a large position and either pressure the company to distribute cash to shareholders or attempt a takeover, causing the stock to rise. These investors might be vilified as corporate raiders, but few investors care about minority rights.

But what happens when the firm’s founder finds themselves as a minority shareholder of the company they built? Or the investor waiting for a big payout discovers the corporate raider is paying a premium price to acquire only enough shares to gain control?

There are usually three primary ways of getting control of a company. First, you can own a controlling interest – 51 per cent of the outstanding shares. Then anything decided on the vote of the majority goes your way. Second, you might not own the majority of shares, but you control the board with a majority of the members voting your way. Here the board determines policy. Third, you might not own a majority of shares, but you control a majority of shareholder votes. This may occur when a company has dual classes of shares, some holding greater voting rights or including a class of share without voting rights.

Control is the desired outcome. If a company is taken private and 100 per cent of the shares have been purchased, the new owner has legitimate control. We enter a grey area when someone owns a majority (51 per cent or more) and exerts control without owning all the shares. Then the majority owner is controlling the minority shareholders investment without having to buy it outright.

So who are these minority shareholders? They could be ordinary investors who buy small positions hoping the stock will rise; company founders who sold to a larger firm and retain some ownership, but not majority control; foreign investors in a domestic company subject to the laws of that country; or shareholders retaining shares in a firm after the majority of shares have been acquired in a takeover.

Smaller shareholders in listed, heavily traded companies usually understand they own a very small part of a very large firm, yet they may still want their voices heard and opinions respected. Problems can develop in the following ways:

* With thinly traded public firms, where the minority shareholder might find it difficult to sell at fair market value if they want to walk away.

* When a company takeover occurs in two steps, the first involving the acquisition of enough shares to gain control and the second buying out the remaining minority shareholders at an unattractive price.

* When majority shareholders and directors consider the company a personal piggy bank, draining the firm of assets and eventually pushing the firm into bankruptcy, depriving minority shareholders of the value of their investment.

Like most systems, unregulated capitalism can develop problems when taken to extremes. Back in the 1880s, the term ‘robber baron’ was coined in the US to describe people who amassed wealth by using controversial techniques, such as unauthorised stock releases or ‘watering stock’. The watered stock technique was used by Daniel Drew in manipulation of Erie Railroad stock in the 1870s. Russian oligarchs found illicit stock manipulation worked well in the 1990s.