A private limited liability company is a small and closed community. Its members, the shareholders, come together by making a financial or other tangible contribution, choose governing bodies, appoint responsible persons. But our company is not a society based on the principles of socialism; disparities of wealth should not affect. The company operates under the terms of old good capitalism, as a Lithuanian folk proverb goes ‘he who pays the piper calls the tune’. Here, the friendship of a majority and a minority shareholder can come to an end.
So, what potential leverage could capture the friendly relationship to avoid disagreements in our company, i.e. to keep the majority shareholder out of disputes, to keep the minority shareholder happy, and to maintain the company thriving? Efforts should be made to meet the minimum requirements of the minority shareholder.
First, the minority shareholder wants to know. Inquirers are generally considered to be troublemakers, thus their right to information is restricted, listing in legislation what information is available. And sometimes not free of charge. This is usually not enough to satisfy curiosity, because the most interesting confidential documents and information are not disclosed according to the general procedure. There may be reasons that such restriction is justified if the minority shareholder has interests in other companies. However, in most cases, information is not given, unless it is compulsory.
According to legislation, analogous restrictions apply to all shareholders, not just to the minority shareholder, but the majority shareholder finds ways to circumvent regulation and provide for more favourable conditions in the company’s articles of association. Information anywhere, including in companies, means influence. Without enough data, you may not even understand that the management is deceiving you, drives the business down or mismanages it.
Second, the minority shareholder wants to block. A small number of shares means a weak voice. How to strengthen it? One can agree to vote together—a united minority can become a powerful force. If there in no one to unity with or there is no wish to do so, you can claim a 100% majority. Such a majority means that either you will have to agree, or no decision will be taken because the minority shareholder will say ‘no’. It is a very powerful tool in a company war that leads to a dead end, therefore this right must be used wisely—only on the most important issues. What is important depends on the situation, but the minority shareholder will always be interested in exercising influence over decisions on the distribution of profits, the material change in the company’s activities and the assumption of obligations, on high-value transactions, the attraction of new investors by increasing the company’s capital. But keep in mind that if the minority shareholder can block, the majority shareholder can also do the same—these rights work in both directions.
Third, the minority shareholder wants to benefit. He may not want to get involved in decision-making or get his head around the business, but he has a legitimate desire for profit. However, there may be a situation where being a shareholder does not bring any tangible benefit. Because the right to receive dividends is not automatic and, excluding all objective financial circumstances, shareholders have to decide. It is easier to make a decision if the principles of profit distribution are agreed in advance.
Fourth, the minority shareholder wants to be able to withdraw. If you sell a small plot of land sandwiched between several large buildings that can only be accessed upon agreement with three neighbours, the value of such a plot is likely to be low. Similar difficulties are faced by the minority shareholder if he wants to sell his share. If your share is not marketable, you may have to sell to those neighbours ‘shareholders’ who may not be willing to overpay, and if your neighbours do not buy, you can be trapped for a long time. The right to be bought out at the market price or to sell together with majority shareholders gives more liquidity to a minority and the shareholder feels more security.
Majority and minority shareholders can agree on the wishes and expectations of both sides by concluding a shareholder agreement. It is also useful when creating a new company, negotiating on management, plans and expectations, and in the case when you join a running community (company) and want the existing players to reckon with you, even if your stake is small. The majority shareholder benefits from the agreement to the extent that the wishes of the minority shareholder are balanced and that after satisfying them, calm and peace in the company will be ensured. Such an agreement works best until both sides are willing to adhere to it, and if views vary, coercive mechanisms are triggered and rallies through courts start. However, in court it can be easier for the minority shareholder to prove his truth, which has already been agreed, than to prove the truth or injustice only he sees.
Indrė Vickaitė-Liatukė is an Attorney at Law at TGS Baltic