Non-Controlling Interests: Defending the Rights of Minority Shareholders

JAN-FEB 2014|BY RAYMOND MATERA
Nikos Hountas, Audit & Assurance Partner, ABACUS Audit & Business Solutions, discusses the fine points of minority shareholder rights and legal recourse to abuse and misconduct.

Why should an investor put his money into a minority investment if a non-controlling interest does not allow him to be involved to the course of the company?

Lack of control is a significant risk to minority shareholders. Good faith says there is relatively strong alignment of interests between minority and majority shareholders (by gaining market share, growing revenues, controlling costs, maximizing operating profits). But practice shows major conflicts of interests may arise when ‘slicing the pie.’

However, a legal framework protects a minority shareholder’s investment. A special resolution passed by a minority shareholder is an effective way to have a profound impact on corporate decision-making and get information. Any shareholder may request information concerning the affairs of the company.

In addition, minority shareholders (depending on the size of their participation in the company), may apply to the court or for a special resolution, on the basis of conducting a special audit, as an investigation, and as a disclosure mechanism to complement minority shareholders’ information rights. In cases of severe “problems” identified or reasonably concluded within the company operations, even the replacement of the company management may be requested by the court.

The inquiry proceeding seems to be an important, if not the most important, source of minority shareholder protection.

Indeed it is. If it establishes that violations of the law or the articles may have occurred, or argues that the affairs of the company are not being conducted in a prudent and honest manner, a special audit, although not always a remedy itself, but the prelude to real solutions, such as a shareholder derivative suit, the oppression remedy (a statutory right available to oppressed shareholders), the exit (of a shareholder), or even the judicial dissolution of the company, is possible. The impact of the right to ask for an audit, because of its preventive effect, is greater than its actual use.

Meaning that, the ability of requiring a special audit can instill confidence to shareholders. What can be the range of an auditor’s authority?

The person(s) appointed to carry out the audit is, as a rule, independent (sometimes chosen by the court).

His/her mission is usually limited: It is often prescribed by the appointing authority, refers to specific acts of management, specific periods and does not extend to the general state of the company’s affairs.

Normally, special audits address matters not audited on a regular basis, but that are important nevertheless. This approach will increase the importance of efficiency and effectiveness of the auditor, who should bring in proper insights and experience.

What are the most common audit findings?

A special audit can provide evidence to the shareholders for bringing a derivative suit to the directors, management and/or other shareholders of the corporation, for a failure by management. This type of suit often arises when there is fraud, mismanagement, self dealing (self-enhancement) and/or dishonesty which are being ignored by officers and the board of directors. Some findings can be:

  • Salaries or wages paid to fictitious employees or unusual amounts paid to directors
  • Money laundering
  • Fabricated property or overpaid property
  • Irregularities in purchasing, bidding, contracting
  • Transfer pricing issues and nominal expenses (organized by a controlling shareholder)
  • Directors or officers who allegedly used the corporation’s assets for personal gain

ABACUS ABS was founded in 2005 by ex-partners of PWC and delivers measurable value to clients through its professionals who offer proven audit, tax, consulting, enterprise risk and financial advisory services.

nhountas@auditabacus.gr; www.abacusnetwork.gr

No Responses to «Non-Controlling Interests: Defending the Rights of Minority Shareholders»