Power to Minority Shareholders: High Time They Got Their Act Together.

Category: Capital Market


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Power to Minority Shareholders: High Time They Got Their Act Together.

 

March 27, 2012 / Proshare
Nigerians have a tendency not to rebel. More often than not, we just complain to no person in particular and succumb to our individual circumstances. Even in our role as minority investors, we carry the same mindset. Quite often, we are used to being abused by deceitful promoters. But is this about to change? 
The position of the minority shareholders is usually more precarious as a result of the narrow understanding of the general legal rule that allows only a company, through its majority shareholders, to assert the legal rights of such a company.
This rule, commonly known as the rule in Foss V Harbottle (1843) 2 Hare 461, is intended to avoid multiplicity of law suits and also to protect our courts of law from interfering in the internal affairs of a company.
However and sometime, the damage to the company is caused by the majority shareholders or their appointed Directors to which situation, the law has created exceptions to this general rule. Most times, this damage is done at the expense of the minority shareholders.
Minority shareholder rights consist of rights that are generally available to all shareholders and rights that may be available under CAMA. Companies are governed by this law and shareholder rights are set out in the corporate statute of the company’s state of incorporation. Typical rights are:
*       The right to vote on the election of directors;
*       The right to amend corporate bylaws;
*       The right to amend articles of incorporation;
*       The right to vote on major corporate events such as mergers, liquidation, or the sale of substantially all the corporation’s assets;
*       The right to take action through a written consent;
*       The right to annual stockholder meetings;
*       The right to call special stockholder meetings; and
*       The right to inspect books and records and the list of shareholders.
The Nigerian rescued banks would have been better off, if minority shareholders had exercised their right to inspect their books and also try to check on the activities of the directors which forms the majority shareholders.
In Oceanic Bank, Cecilia Ibru was found guilty on charges of fraud and mismanagement.  Akingbola was sacked in August 2009 by the Central Bank of Nigeria (CBN) along with other bank bosses over allegation of mismanagement. All these would have been averted if minority shareholders have exercised their rights to the fullest.
Based on the evidence gathered from the offer documents of the companies in the table below, it is apparent that most of the companies never met their forecast for the period in question except for Bank PHB which surpassed its PAT forecast by 27.98%. At present, Bank PHB (Now keystone Bank) has since been nationalised after being rescued by CBN/AMCON. Also, Daar Communications Plc’s proposed dividend of N2.5 mln and has not fulfilled the forecast promise till date.
Issues like this can be taken up by the minority shareholders in order to help improve the company and its corporate governance ethos.
 
Specifically, the shareholders argued that a company has been in business for four years, recording continuous improved performance in its operations and should consider its dividend policy to extend part of its profit to the stakeholders who invested in the business based on the offer prospectus. They insisted that come next financial year, dividend should be offered to reward their respective investments in the business.
The shareholders also sought the retirement of board members they assessed as being too old to continue as directors of the company. Special mention was made of directors who were in their 70’s or close to that age. Actions like this is what is expected of minority shareholders in order to protect their investment in the company
The call for intervention will surely help attend to some problems in the company as many of the shareholders have expressed their intention of not wanting the company to die as a result of the unaccounted and mismanaged fund.
At the International stage, a recent move by The Children's Investment (TCI) Fund, a London-based hedge fund has set a new precedent that could mark the beginning of shareholder activism in India. Just a few days back TCI has sent a letter to Coal India – in which TCI’s 2 per cent stake makes it the biggest shareholder after the Indian government, with 90 per cent – accusing it of committing a “breach of fiduciary duties” to minority shareholders by reversing an earlier steep increase in the price it charges for coal.

“We are strongly considering taking legal action against CIL’s individual Board Members for breach of fiduciary duties if no clear commitments are made public in the immediate future to provide parity of coal prices to import prices and rectifying the other breaches of fiduciary duties we have outlined in this letter,” wrote Oscar Veldhuijzen, a partner at TCI, in the letter obtained by the FT.

Cases of promoters wanting to give a better deal to group companies for their vested interests have thwarted shareholders' interests several times.
Thus, regulators should propose a law to restrict the elbow room for promoters to ignore minority shareholders may be of long term interest to investor community. All stakeholders must have a say in the future plans of the businesses they own.
Will this revolt be successful? And how long will promoters take minority shareholders for granted? It is high time they get their act together. If they are not ready to respect the rights of minority shareholders, they could certainly shun the stocks of companies that show no regard for their rightful opinions.
Minority shareholders often find that they are unable to exercise their rights because the majority shareholder(s) control the corporation. Minority shareholders should address this issue by exercising their freedom to contractually secure greater rights than the corporate statute explicitly allows.
 


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