Importance of Protecting Minority Shareholders

Added on - 13 Sep 2019

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DERIVATIVE SUITPROTECTIONOFMINORITYSHAREHOLDERS
DERIVATIVE SUITImportance of protecting minority shareholdersIn today’s world with the high focused media reports on the scandals prevailing in the corporateworld, links the financial crises to the negligible protection forwarded to the minorityshareholders. The studies linked to this topic of lesser protection to the minority shareholderssuggests that the majority shareholder have the tendency to expropriated minority shareholder,and in so doing makes the maximum benefit out of it1.In each and every company the rule which is followed is the majority rule, i.e. thecontrol overthe firm’s operational activities by the majority shareholders or by the exercise of the managerialpowers by the majority shareholders. This compliance of the majority rule is not at all contraryor in detriment to Law. But, still there lies the reason which seeks to protect the minorityshareholders. The most obvious and the straightforward reason is that when the above twopractices are followed by the majority shareholders then it sometimes become oppressive for theminority shareholders. This mechanical rule which applies to the majority shareholders, if goesunchecked becomes detrimental to the minority shareholders and hence making it contrary tolaw, and which in near future will be the witness to the destruction of the company2.So, for theeffective maintenance of the business environment an enhanced method must be implementedand thus executed for the rectification of the mistakes and in so doing the monitoring of it ispaced up. Again, for the protection of the minority shareholders, derivative suits are consideredto be the best approach for maintaining the corporate governance to get relief or remedy, againstany director on whom the benefit of the company is vested to assert their rights3. But, for the1[CITATION BIR07 \l 1033 ]2[CITATION LMI05 \l 1033 ]3[CITATION ISB07 \l 1033 ]1|P a g e
DERIVATIVE SUITminority shareholders, the derivative claims are allowed only when there is solvency in thecompany and shares which are claimed have the substantial value.The protection of minority shareholders is important because, the growth in the economy getsstimulated by this and also the agency costs of the firm gets reduced which benefits the firm as awhole, thereby resulting in the efficient management of the firm. Furthermore, the protection ofthe minority shareholders helps in the cross listing which is listing stock with theforeign stockexchange and also trading in the very nation where the company is incorporated4.Derivative suit to help protect minority shareholdersThe derivative action by the minority shareholder, dates back to Anglo-Saxon legal system,where lawsuit is brought into action by the shareholder on company’s behalf, due to the damagesso borne by the actions of directors or any other people within the company or outside it5.Thederivative suit challenges those damages and seeks judicial reparation5.4[CITATION SMA08 \l 1033 ]5[ CITATION Har12 \l 1033 ]2|P a g e
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