North South University
LAW 200
Assignment # 2
Prepared for:
Barrister A.M. Masum Faculty of Business
North South University
Prepared by:
ID NAME 062 528 030 M.Montasir Imran Khan
Section: 02
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“A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company.”- Explain & Illustrate? 1. Introduction:
The basic principal relating to the administration of the affairs of a company is that “the will of the majority is supreme”. The general rule is that the decisions of the majority shareholders in a company bind the minority. 1 In a world that recognizes ‘simple majority rules’, minority shareholders of companies are by default vulnerable to oppression,
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The majority shareholder is often the Based on a study commissioned in April 2004 by Jardine Lloyd Thompson Pte Ltd, there were a total of 19 cases
founder of the corporation.
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of minority shareholder claims (personal and derivative) for oppression under Section 216 of the Companies Act.
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Shareholders holding minority interests in closely-held corporations are at risk of unfair or oppressive treatment8 by the majority or controlling shareholders, to an extent well beyond that of their counterparts in partnerships or in corporations whose shares are publicly traded.
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Sometimes directors and officers of closely held corporations that have acted fraudulently or illegally mismanaged the corporation and also acted oppressively or unfairly toward one or more minority shareholders. Shareholder oppression occurs when the majority shareholders in a corporation take action that unfairly prejudices the minority. It most commonly occurs in close corporations because the lack of a public market for shares leaves minority shareholders particularly vulnerable, since minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation.10The majority shareholders may harm the economic interests of the minority by refusing to declare dividends or attempting a squeeze out. Majority may physically lock the minority out of the corporate premises and even deny the minority the right to inspect corporate
Despite the decision in Gambotto being widely seen as a significant victory for minority shareholders , as the High Court “dramatically turned the tide of power in favour of minority shareholders” the subsequent responses have seen an unwillingness to follow the ruling made, which therefore means a move away from minority rights, as was the case before the High Court judgement
This situation can lead to negative consequences for a business when its executives or management direct the organization to act in the best interest of themselves instead of the best interest of its owners or shareholders. Stockholders of the enterprise can keep this problem from arises by attempting to align the interest of management with that of themselves. This normally occurs through incentive pay, stock compensation, or other similar incentive packages that now cause the managers financial success to be tied to that of the company (Garcia, Rodriguez-Sanchez, & Fdez-Valdivia, 2015; Cui, Zhao, & Tang, 2007; Bruhl, 2003; Carols & Nicholas,
|greater. There are several examples of share holders using their power to influence large corporations. For example in 2003 as part of |
Lipton, P. & Herzberg, A. (2010). Understanding Company Law. (15th ed.). Pyrmont, NSW: Lawbook Co.
In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events
1. Consider Dunlap’s statement on page 3 of the case: “Stakeholders! Every time I hear the word, I ask how much did they pay for their stake? There is only one constituency I am concerned about and that is the shareholder primacy? Do you agree or disagree with Dunlap’s view of shareholder primacy? Explain
The company believes that the executives and directors should own the stocks. In order to be a stockholder,
This allows for the act of tunnelling, which is a way of directing company assets and future business towards core owners so they can retain control over the country’s corporate sectors with low cash flows. Tunnelling methods such as providing low interest rates, selling assets, lowering market prices, technology licensing and joint ventures, means dominant share holders can have the direct benefit of using retained earnings for personal gain at a minority shareholders expense, hindering their development in capital markets. Not only this, but growth has been linked to diversification, a consequence of expropriation, and its impact on organisational performance. However, this theory is conflicting because structural characteristics, resulting from family ownership, can decrease the popularity of business groups in terms of outside investors, and complex company linkages can relate to inefficient investment, unreliable accounting and possible inadequate managers through inheritance.
Categorized by the natures, shareholders are recognized as the banks, trusts, insurance companies, private equity fund, public pension funds, religious groups, worker unions or a unique individual who is a natural person. They can be divided into the majority or minority shareholders, institutional or individual shareholder based on the group sizes and functions. The majority or institutional shareholders are continually believed to play an unprecedented role in corporate governance. King (2009) believes one of the major reasons for market failures connecting with governance is due to the absence of institutional shareholders. From the view of the sponsor’s motivations, the shareholders are financial activists who focus on the firm’s performance and social activists who pay more attention to corporate social responsibilities. Within the limit of this research, we differentiate the sponsors population into two distinct groups: the gadfly group that represent for all hyperactive individual shareholders and the other shareholder groups which include all other remain shareholder
Corporate governance is a set of actions used to handle the relationship between stakeholders by determining and controlling the strategic direction and performance of the organization. Corporate governance major concern is making sure that the strategic decisions are effective and that it paves the way towards strategic competitiveness. (Hitt, Ireland, Hoskisson, 2017, p. 310). In today’s corporation, the primary objective of corporate governance is to align top-level manager’s and stakeholders interest. That is why corporate governance is involved when there is a conflict of interest between with the owners, managers, and members of the board of directors (Hitt, Ireland, Hoskisson, 2017, p. 310-311).
The protections under the Corporations Act suffice to guard the minority from the majority’s unfair wrongdoing. In fact, the Australian corporate law provides significant protections on shareholders. To support the argument, this essay discusses Foss v Harbottle rule and derivative action. It also elaborates exceptions to the rule, especially ‘fraud on the minority’ and statutory protections available for the minority protection under the Corporations Act. These are analysed in views of organic theory, economic theory and aggregate theory. It concludes with that specific protections for the minority are unnecessary because these may lose the balance of a corporation and the minority and majority members.
The principals (the shareholders) have to find ways of ensuring that their agents (the managers) act in their interests.
While shareholders’ agreements take away the directors’ discretions across a range of important matters, investors still claim to value the right to appoint a director. They actively encourage close relationships and communication between shareholders, directors and management. In fact, the size of many boards is determined by the maximum size of the shareholding that can be attracted without director representation. This frequently results in shareholdings of 5 to 7% appointing a director and, in combination with independent chairman, can produce boards of 15 or more directors.
There was a time when big shareholders, typically institutions, were very quiet investors who let Boards get on with running companies with barely a murmur of complaint. But not any more it seems. In recent months, many companies have heard their biggest shareholders complaining, both at the AGM and beforehand in the Press, about everything from strategy to director pay issues. Whilst the biggest shareholders often have small percentage holdings they are getting listened to more and more. They have found ways to increase the volume of their “stakeholder voice” by using the Press, or by voicing their concerns through an umbrella body such as the Association of British Insurers. The ABI’s members control a large percentage of the overall stock market, meaning that companies are far more likely to have to listen. Why are they suddenly shouting? A mixture of poor performance, the institution’s own investors shouting at them, and a belief that better governance leads to improved profits and a better share price.
Managers and shareholders are the utmost contributors of these conflicts, hence affecting the entire structural organization of a company, its managerial system and eventually to the company's societal responsibility. A corporation is well organized with stipulated division of responsibilities among the arms of the organizational structure, shareholders, directors, managers and corporate officers. However, conflicts between managers in most firms and shareholders have brought about agency problems. Shares and their trade have seen many companies rise to big investments. Shareholders keep the companies running