Meaning
Legal avenues for relief protect members of a company from conduct that is both prejudicial to their interests and unfairly administered by the majority. An unfair prejudice remedy is usually sought by minority shareholders when the directors or majority owners act in a way that devalues their shares or excludes them from management without justification. The most common result of a successful claim is an order for the majority to buy out the minority’s shares at a fair value.
This prevents the majority from “locking in” a small investor and then ignoring their rights.
Court Intervention
Audit of the company’s past decisions is the first step in a legal challenge under this rule. The court will look for evidence of self-dealing, excessive executive pay or the failure to pay dividends while the company is profitable. Readiness for such a case involves having clear records of all board meetings and the reasons for every major decision.
Proving that a choice was made for the good of the company and not just for the majority is the primary defense.
Share Buyback
The cost of a lost case is often the requirement for the majority to find the capital to purchase the minority stake. This can be a massive financial burden that affects the company’s capacity for future growth. The valuation of the shares is usually done by an independent expert, and the court often forbids any discount for the fact that it is a minority stake.
This ensures the departing shareholder receives a truly fair price.
Equity Protection
Capability in corporate governance is measured by the ability to prevent these disputes before they reach a courtroom. Clear shareholder agreements that define how disputes will be resolved and how shares will be valued provide the best protection. The demonstrated ability of a firm to resolve internal conflicts fairly is a signal of its stability to the market.
A successful organization avoids the high cost of litigation by respecting the rights of all its owners.
