What Is a Majority Shareholder? Definition, Rights and Privileges

Summary

A majority shareholder is an entity or individual that owns over 50% of a company's outstanding shares, granting them significant control and influence within the organisation. This control is exercised through voting power, board representation, and decision-making rights. Majority shareholders also enjoy privileges such as access to critical corporate information, control over management appointments, and flexible exit strategies. These ensure greater profits and wealth creation. To gain insights into a company's governance and decision-making dynamics, one needs to understand the role of majority shareholders.

Owning the stocks of a company makes you a shareholder. Most shareholders own a relatively small percentage of the total company’s stocks. However, in some cases, shareholders may end up owning most of the shares, or more than 50% of the shares issued by a company. This makes them a majority shareholder.

Majority shareholders are known for their essential role in decision-making processes within a company. This makes them a pivotal element in the complex world of corporate ownership and management. As an investor, it is crucial to understand the concept of majority shareholders since they wield significant influence over company operations. However, to understand the concept in its entirety, we must delve into the definition of a majority shareholder, their rights, and the privileges they enjoy.

Definition of a Majority Shareholder

A majority shareholder is best described as an individual or entity that holds more than 50% of the total outstanding shares of a company's stock. This gives them the power to easily sway voting outcomes and change the direction in which the company is headed. Therefore, majority shareholders hold notable control over the day-to-day affairs of the company, and can decide its fate in the future. Note that the exact percentage required to be considered a majority shareholder usually depends on the company's bylaws and the legal framework in the jurisdiction where the company is incorporated.

What Are the Rights of a Majority Shareholder?

The most important rights of majority shareholders include:

1. Voting Power: They reserve the ability to cast their vote to elect the board of directors, approve major transactions, and shape the company's strategic direction. In many cases, majority shareholders also influence the outcome of shareholder meetings. Such privileges enable them to exercise significant influence over the corporate governance of the company.
2. Board Representation: Majority shareholders often exercise their privilege by appointing their representatives to the company's board of directors. These board representatives can advocate for their interests and ensure that company policies align with their goals. This gives majority shareholder high-level decision-making and governance powers in the board of a company.
3. Dividend Decisions: The distribution of dividends to shareholders is also influenced by majority shareholders. The amount and timing of such dividends are often voted on by them and they end up having a notable impact on the return on investment for all shareholders.
4. Asset Sales and Mergers: Consider a case where a company is thinking of selling assets or merging with another entity. In such a scenario, majority shareholders have the authority to approve or veto such transactions. This power can help protect their interests and be a contributing factor to shaping the company's future.
5. Corporate Strategy: With their powers, majority shareholders play a vital role in determining the overall corporate strategy. Some of the changes that may be advocated by them are- changes in business operations, expansion plans, or cost-cutting measures that align with their objectives. Their actions also have a great impact on company decisions such as capital allocation, investments in research and development, or acquisitions.

Privileges of a Majority Shareholder

Being the largest stakeholders, majority shareholders enjoy several privileges since they have a bearing on the company’s actions.

1. Access to Information: Majority shareholders own most shares and thus often enjoy privileged access to exclusive corporate information, financial reports, and executive management. This gives them a good idea about the company's performance and enable them to make informed decisions that benefit their interests.
2. Exit Strategies: Majority shareholders can exit the company at their will. They enjoy a great amount of flexibility when it comes to exit strategies. They can initiate and negotiate the sale of their shares, potentially realising substantial gains.
3. Control over Management: Majority shareholders can influence the selection and appointment of top-level executives, including the CEO through the virtue of their voting power and board representation. Their strategic vision is of utmost importance, and they make sure to align them with that of the company management.
4. Potential for Greater Profits: As with any financial strategy, the greater the risk and responsibility, the greater the capability for profits. The sizeable control and influence of majority shareholders can be used to implement strategies that maximise profits and shareholder value. Therefore, compared to minority shareholders, majority shareholders can have the scope to realise higher returns on their investments.

Conclusion

Majority shareholders are considered crucial figures in the corporate world as they possess significant rights and privileges that allow them to shape the destiny of a company. They play a pivotal role in the governance of companies, thanks to their privileges that allow them to steer the course of a business and impact the lives of employees, stakeholders, and fellow shareholders. However, their responsibility is catered towards the best interests of all shareholders, and they must ensure transparent corporate governance, in return for substantial gains.