Can I Dilute Minority Shareholders?

Share at:
AI Share Buttons - Mobile Logo Only
LinkedIn
X
Facebook
WhatsApp
Threads

Majority shareholders may dilute minority shareholders to gain greater control of a company. Generally, the issuing of new shares makes each share of a company worth less – diluting the minority. Without a shareholders agreement, this oppression may occur. This article breaks down the law on this topic.

Table of Contents

How is diluting shareholders done?

Majority shareholders can create new shares in the company for them to control. This dilutes all the current shares. However, as the majority have issued themselves additional shares, they have greater control of the company. Doing so will dilute the minority shareholders votes and earning capabilities.

Due to the shareholders having a direct impact on the Board of Directors, the majority have the power to force the issue of new shares.

Why would this be done?

Two predominant reasons emerge as to why a majority shareholder might attempt to dilute the minority.

Buying the shares at below true value

As the value of the minority’s shares diminish, it’s common for the majority to buy the shares at below their original value. If the shares weren’t diluted, they would still be worth more. Thus, the majority would’ve had to pay more.

Voting requirements

Special resolutions within a company require a minimum of 75% of the votes cast by members with voting rights. For example, changing constitutions, changing the company name/type, or winding up a company require the 75% of votes.

The majority shareholders may dilute the minority’s shares, to ensure they reach the 75% threshold required.

No.

The Corporations Act 2001 (Cth) allows the court to take action against a company or shareholders that conduct oppressive or unfair action against other shareholders. Companies in Australia have been punished for issuing shares for the purpose of diluting the minority.

Get on demand legal advice for one low monthly fee.

Sign up to our Legal Advice Plan and access professional legal advice whenever you need it.

The punishments can be significant. They include:

  • That the court can decide the purchase price of the shares.
  • An injunction preventing the dilution.
  • Winding up of the company.

Looking after your members is an important part of belonging to a company. Therefore, it is important to treat all shareholders as equal. Bullying or oppressing minority shareholders will lead to significant issues for both the company, and the majority shareholders.

Final thoughts

In conclusion, diluting minority shareholders is an oppressive action, making it illegal. A company and their majority shareholders face significant punishments for the purposeful dilution of the minority’s shares. For issues or further enquiries on this topic, a commercial litigation lawyer may be able to assist.

Find the perfect lawyer to help your business today!

Get a fixed-fee quote from Australia's largest lawyer marketplace.

Share at:
AI Share Buttons - Mobile Logo Only
LinkedIn
X
Facebook
WhatsApp
Threads
You may also like
Recent Articles

Get the latest news

By clicking on 'Sign up to our newsletter' you are agreeing to the Lawpath Terms & Conditions

Share:

eBook

Download our eBook,
Hiring Your First Employee

Our eBook covers the necessary legal and financial considerations you should make when hiring your first employee.

You may also like

EasyCompanies has shut down, but your business is still safe. Learn what this closure means and how Lawpath can help you move forward.
This article will explore everything you need to know about the new right to disconnect laws and how they impact you.
This attempt to hold Kmart accountable for alleged links to Uyghur forced labour in supply chains sends ripples far beyond the retail giant's boardrooms. Small businesses should be aware of the impact of the modern slavery legal regime into every sector of our economy.