Equal Treatment of Shareholders and Protection of Their Rights

By Group 1

INTRODUCTION (MS THEI)

Every corporation, large or small, has shareholders. A corporation has both

majority and minority stockholders both of which possess rights and obligations to the

corporation. However, as to the extent and limitation of each kind is determined by

the provisions of the existing Corporation Code of the Philippines and contractual

protections. In large corporations with stock bought and sold on a public stock

exchange, shareholders can easily sell their shares. However, shareholders in privately

held, close corporations (where shares are owned by a small number of persons)

cannot as readily sell their shares.

Majority shareholder is a shareholder who owns and controls most of a

corporation’s stock. Only those persons who own more that 50 percent of a

company’s shares can be a majority shareholder. Generally, a majority shareholder

has more power than all of the other shareholders combined. S/he also has the

authority to do things that other shareholders do not have, such as replacing a

corporation’s officers or board of directors. Majority shareholder is commonly seen in

private companies rather than public companies.

In privately held corporations, especially smaller privately held corporations, the

stock cannot be readily valued and sold on a public exchange. Without state laws that
grant minority shareholders in close corporations certain rights and protections, those

minority shareholders are particularly vulnerable to the oppressive actions of the

controlling shareholders, and they have little ability to sell their interests quickly or

protect their investment.

PART I : Minority Shareholder Rights and Why They Matter?

A minority shareholder is any shareholder that does not exercise control over a

corporation. By definition, minority shareholders own less than 50% of the

company’s outstanding shares. Minority shareholders have certain legal rights. Their

minority shareholder rights are determined by the law of the state where the company

was incorporated.

In the Philippine legal system, the Securities and Exchange Commission together with

other governmental agencies are vested with the obligation to secure that the rights of

all shareholders including that of the minority shareholders are protected. Taking

into account that the minority shareholders are the ones whose rights are frequently

disregarded and defrauded.

When a corporation, acting through its officers, directors, or majority shareholders,

violates the rights of a minority shareholder, the minority shareholder can bring an

action against the corporation. If you are a minority shareholder in such a case, you

should consult a litigation and dispute resolution attorney to discuss your case. An

attorney with experience in these matters can help you understand and protect your

rights. The primary rights of shareholders relate to their entitlement to vote at

meetings of the shareholders. While this does not confer a direct role in management

of the company, the directors are required to implement those decisions of the

shareholders, which are reserved to them.

 The following are among the rights of minority shareholders that are universally

accepted and implemented in almost all countries: (a)Fiduciary Duty Owed by

Majority Shareholders. Under most states’ corporation laws, the majority shareholders

owe a fiduciary duty to the minority shareholders. This means that majority

shareholders must deal with minority shareholders with candor, honesty, good faith,

loyalty, and fairness. Minority shareholders have the right to expect company officers

and directors to act in the company’s best interests and in compliance with the

shareholders agreement. Ways that majority shareholders can breach this fiduciary

duty is when they form other companies to compete directly with the corporation, pay

themselves high salaries, or sell stock of the company on terms favorable only to

themselves.

In some cases where the majority shareholders have breached a fiduciary duty to a

minority shareholder, the minority shareholder may be able to file a shareholder

derivative action. This is a special kind of lawsuit available to a shareholder when

corporate management knows that an officer, director, employee, or shareholder has

engaged in self-dealing and fails to protect the interests of the corporation. In this kind

of lawsuit, a shareholder can ask a court to allow the lawsuit to proceed in the name of

the corporation.

If a minority shareholder believes that corporate management has acted with intent to

defraud any person, or exercised power in a manner that is oppressive, unfairly

prejudicial, or that unfairly disregards the minority shareholder’s interest (often

reducing the value of the minority’s interest), the minority shareholder may initiate a

lawsuit against the majority shareholder(s) and seek an appropriate remedy.

(b)Access to Company Financial Records. As mentioned above, every shareholder has

the right to attend company meetings, vote the shares, and review the company’s

books and records. To exercise these rights, shareholders have to follow applicable

state law and company procedures. For access to company information, for example,

the shareholder usually must make a written demand on the corporation and put forth

a proper basis for the request.

(c)Minority Discount. A minority discount is assigned to minority shares when a

private company values its shares in preparation to sell or transfer ownership. This

discount on minority shares reflects the fact that minority shares are not as valuable

because they do not provide as much company ownership as other shares. Ironically,

minority shareholders can buy shares for less than other investors and still receiving

many of the same benefits of stock ownership. This is one advantage to being a

minority shareholder.

(d)Benefit from Shareholdings. Minority shareholders have the right to benefit from

such events as receiving dividends and selling shares for profit. However, these rights

can be suppressed by those in control. For example, the company directors can decide

not to pay dividends or not to purchase shares from shareholders. If a minority

shareholder believes a majority shareholder is suppressing minority shareholder rights

to benefit from shareholdings, it is time to consult with an experienced attorney. The

attorney can help the minority shareholder follow the proper procedures and force the

corporation to purchase his or her shares for a value determined by a court.

A shareholder is entitled to notice of and to attend meetings of the

shareholders and to obtain minutes of these meetings. Shareholders are also

 entitled to a copy of the annual financial statements of the company. Any

additional entitlements must be specifically conferred.

In order for a meeting of the shareholders (or any class of shareholders) to be held it

must first be properly convened. A meeting of the shareholders is convened by means

of a notice, which sets out the date, time, venue and matters to be discussed. The

notice periods vary from 15 days to 21 days depending on the type of resolutions to be

passed. Included in the notice must be a copy of all resolutions that the company

wishes to pass and the voting percentage required to pass the resolution. In addition a

notice convening an annual general meeting must contain a summary of the annual

financial statements.

The notice of the meeting must contain an entitlement of the shareholder to appoint a

proxy to attend, participate in and vote on its behalf. The proxy must be appointed in

writing and signed by the shareholder making the appointment and the appointee need

not be another shareholder. A proxy remains valid for one year unless the shareholder

has appointed the proxy to perform some specific function. A copy of the written

proxy must be delivered to the company before the meeting (usually 48 hours). If a

proxy is appointed, it does not mean that the shareholder can no longer act. If the

shareholder attends the meeting, then the proxy is temporarily suspended. The

shareholder may also revoke the proxy at any time.

If a company either does not give notice of a meeting, or if the notice is somehow

defective, the resolutions taken may not be valid.

It is also possible to pass resolutions by means of a written document circulated to all

of the shareholders, and if the requisite percentage of shareholders votes in favour of

the resolution, then it will be passed.

A quorum for a meeting of the shareholders is 25% of the shareholders present in

person or by proxy in respect of at least one item on the agenda. If the company has

more than 2 shareholders then the meeting may only begin once 3 or more

shareholders are present.

When voting at a meeting occurs by a show of hands, each person present is only

entitled to one vote, irrespective of the number of shares he may actually hold. When

voting at a meeting occurs by poll, all the voting rights may be exercised that attach to

the shares.

The general principle that applies to votes is that of majority rule. Each shareholder

agrees to be bound by the majority’s decisions. This majority may be an ordinary

majority (habitually 50% +1) or a special majority (habitually 75%). In terms of the

New Companies Act the above thresholds may now be amended either higher or

lower, provided that at all times there is at least a 10% voting differential between an

ordinary and special resolution.

It terms of the New Companies Act there are really only three types of special

resolution which are required to be passed as such – they are:

 Altering the company’s Memorandum of Incorporation (this would include

converting ordinary shares into another type of share, changing the main

business and objects of the company and the like);

 The voluntary winding up of the company; and

 Disposals – whether in terms of a material asset sale, a merger or

amalgamation transaction or the entering into a scheme of arrangement with

creditors.
Companies frequently set out additional matters which would have to be effected by

means of a special resolution, and these have habitually been contained in a

shareholders’ agreement . As the principle governing document under the New

Companies Act is the Memorandum of Incorporation, those companies with

additional special resolution requirements (for example the changing of the auditors

or the incurring of certain types of debt) should transfer these into their Memoranda of

Incorporation in order for them to retain efficacy.

As can be seen therefore, the only material impact to the shareholder’s rights and

duties under the new regime, relates to the voting thresholds and the manner in which

these thresholds are set out in the Memorandum of Incorporation.

What rights do all common shareholders have?

Individuals that own common shares of company stock are viewed as the true owners

of that company. As such, a common shareholder has specific privileges and rights

that are governed by the laws that prevail in the state where the company is

headquartered.

The most important rights that all common shareholders possess include the right to

share in the company's profitability, income and assets, a degree of control and

influence over company management selection, preemptive rights to newly issued

shares, and general meeting voting rights.

The Right to Share in Profitability

As partial owners of the company, common shareholders have the right to participate

in a company's profitability for as long as they own the shares. Division of profits is

based on the number of shares owned by a shareholder, and gains can be substantial to

shareholders over time.

In addition to a share in profits generated by the company, shareholders also have

rights to income distributions through dividend payments. If a company's board of

directors declares a dividend in a certain period, common shareholders are in line to

receive it.

Dividends are not guaranteed, however. If the company is liquidated, common

shareholders have the right to assets and income of the company

after bondholders and preferred shareholders are paid.

The Right to Influence Management

Common shareholders also have the right to influence company management through

the election of a company's board of directors. In smaller companies, the president or

chairperson of the board is typically the individual who owns the largest share of

common stock. Larger companies may have greater diversity in the common

shareholder investor pool.

In either case, individuals in management of the company do not own enough of a

stake in the company to influence who sits on the board of directors. Shareholders

have the right to influence who holds management positions through control over

election of board members.

The Right to Buy New Shares

Common shareholders also have preemptive rights. If the company issues new shares

to the public, current shareholders have the right to buy a specific number of shares

before the stock is offered to new potential shareholders. Preemptive rights can be

valuable to common shareholders, as they are often provided at a subscribed price on

a per-share basis.

The Right to Vote

Arguably, the greatest right for common shareholders is the ability to cast votes in a

company's annual or general meeting. Major shifts within a publicly traded company

must be voted on before changes can take place, and common shareholders hold the

right to vote either in person or via proxy. Most common shareholder voting rights

equate to one vote per share owned, resulting in greater influence from shareholders

who own a larger number of shares.

The Right to Sue for Wrongful Acts

Common shareholders who feel their rights have been violated also have the right to

sue the issuing company. A court has the power to enforce common shareholder rights

when corporations are found to have violated their rights, either through a single

shareholder complaint or as a class-action lawsuit.

Protection of minority shareholders

A minority shareholder has certain statutory rights, depending on the size of its stake in

the company. Under Philippine law, an interest of 25% gives the shareholder the power

to block the passing of special or extraordinary resolutions, which covers a limited but

important number of matters. However, a minority shareholder cannot block ordinary

resolutions, which are decided by majority vote and are required for most decisions of

the company. A minority shareholder may also, in extreme circumstances, be able to

apply to the court on the basis of conduct which amounts to unfair prejudice by

majority shareholders, but the remedy is limited and rarely a satisfactory protection.

Given the limitations of the protection afforded by statute, minority shareholders will

seek express contractual protections in the shareholders’ agreement and/or bylaws of

the company. A minority shareholder with a large stake or in a strong bargaining

position may seek a right to appoint a director supported by a requirement that its

representative is a necessary part of a quorum. It is also important to have veto

rights over certain important matters (known as reserved matters) which can then

be entrenched at board or shareholder level, through the requirement that they be

subject to unanimous or super-majority approval.

Additional protections for minority shareholders may include tag-along rights, and

establishing a put option, whereby majority shareholders can be obliged to purchase

the shares of the minority shareholder in accordance with a pre-determined price

formula and at a defined stage.