Minority Shareholder Protection in SMEs: A Question of Information Ex Post and Bargaining Power Ex Ante?

Abstract

SMEs or, as they are called here, ‘close corporations’, differ in many respects from publicly traded companies. Shares in publicly traded companies have a regulated market which shares in SMEs do not have. Since there is no regulated market for the shares there is usually a lock-in effect in the sense that, in the absence of contractual terms or rules in company law or in the articles of association, (minority) shareholders cannot sell their shares because of the lack of a market or at least they cannot sell them on ‘fair terms’. Furthermore, I suggest that the historical theoretical assumption behind most of the rules in company law in general on protection of the minority is that minority shareholders should only have protection equivalent to their share of the voting rights and/or capital in the company. However, for efficiency reasons, I believe that most minority rules based on this assumption fail to achieve their purpose, namely the protection of the minority in close corporations. The reason for this is that any minority protection based on proportional protection will put the minority shareholders in a relatively weaker position than the proportional rights of those shareholders. To achieve the intended minority protection, I believe the following two conditions have to be met. First, where a particular transaction or event discriminates against a minority shareholder (or shareholders), protection for minority shareholders can only be achieved after the transaction or event, and only if the minority shareholders have access to information equal to or at least similar to a hypothetical perfect market situation (a perfect information position). Second, minority shareholders who do have access to information equal to or at least similar to a hypothetical perfect market situation will be in a bargaining position based on the same information. However, even with this information, minority shareholders will be at a bargaining disadvantage vis-a-vis majority shareholders. The reason is that the position of a minority shareholder in a close corporation, as reflected in the minority share of the voting rights and/or capital, is a bargaining disadvantage in itself. Only by strengthening the relatively weaker bargaining position of the minority shareholders after a discriminatory situation, but prior to negotiations between the minority shareholders and the majority shareholders to negate the discriminatory behaviour, will there be a solution that is proportional to the minority shareholders’ share of the voting rights and/or capital in the company (as well as others interests of minority shareholders in a close corporation, to the extent these can be protected by law). Hence, the minority shareholders’ weaker bargaining position has to be strengthened by minimum legal rules and a right to opt in to a higher level of protection in the articles of association.