Introduction to Minority Shareholder Rights

Guide to Minority Shareholder Rights in a Company.

This guide is to facilitate the understanding of minority shareholder rights under Common Law. It addresses the possible legal protections and remedies available to a minority shareholder, or which a minority might seek to include or exercise, in order to protect its position if things go wrong with a company ("Company"). It is not intended to provide a detailed analysis of the law, but gives general guidance on the most important matters to be taken into account.

Shareholders Agreement is the best form of legal protection for a minority shareholder. It allows a minority shareholder to incorporate express contractual provisions above and beyond those afforded by statute and corporate law. Members are often confused on which document to use in relation to Shareholders Agreements.

If the minority shareholder considers that the majority shareholder or any of its directors is in breach of any obligation to the Company (including, for example, breach of other ancillary contracts or breach of warranty under any asset transfer agreement at the time of forming the Company), the minority shareholder needs to ensure that the Company's right of claim cannot simply be blocked by the majority. Common solutions are:

- to provide that responsibility for pursuing any such claim against the majority shareholder should be delegated to a committee of the Company board excluding the appointees of the majority shareholder - or delegated to the minority shareholder as a agent of the Company; or

- to provide, generally, that the majority shareholder (and/or its appointed directors) shall not vote on or interfere with or obstruct any such claim - but without prejudice to its right to defend or resist any such claims.

Other possible protections which a minority shareholder may seek in any particular case include undertakings that the majority shareholder will ensure that:

- the Company maintains proper insurance (particularly product liability insurance), prepares and maintains proper books of account and conducts the business in accordance with all applicable laws;

- key employees enter into appropriate non-competition covenants, confidentiality agreements and employment contracts - including, in technology ventures, employment contracts which provide (so far as possible) that intellectual property devised by employees belongs to the Company.