Above + Beyond

Budoor Al Halwachi ([email protected]) – Associate


In the intricate landscape of corporate joint ventures, the allocation of control between majority and minority shareholders holds significant implications. The majority shareholders, by virtue of their majority share, possess the authority to steer the joint venture’s direction at both the board and shareholder levels. They exercise this power through means such as appointing directors and chairpersons and passing Board resolutions. However, this control dynamic often leaves minority shareholders in a vulnerable position, lacking influence over decision-making processes. To address this inherent imbalance, minority shareholders commonly seek additional protective measures through shareholders’ agreements and the company’s deed of incorporation. In this article, we explore how shareholders’ agreements and the company’s deed of incorporation play a pivotal role in protecting the interests of minority shareholders. By understanding the significance of these contractual arrangements, both majority and minority shareholders can foster a more equitable and successful joint venture, where all stakeholders play a role in shaping its future.


Minority Shareholders’ Protections

In the context of a joint venture, the extent of influence that shareholders wield over the joint venture’s operations is determined by their respective ownership interests in the company. While majority shareholders typically enjoy greater control, it is possible to enhance the position of minority shareholders through carefully crafted provisions in the joint venture company’s deed of incorporation. These provisions, designed to safeguard the rights of minority shareholders, can be introduced as amendments to the existing deed of incorporation. By incorporating these protective measures, the interests of minority shareholders can be effectively upheld within the joint venture structure. In light of this, the following express provisions may be introduced in the deed of incorporation to safeguard and protect the interests of minority shareholders:

Appointment and Removal of Directors: It is customary for minority shareholders to possess the authority to appoint or dismiss directors. Each director should receive proper notification of board meetings, posses complete rights to attend such meetings and be granted access to information pertaining to the company’s management.

Quorum for Board Meetings: To safeguard their interests, minority shareholders seek to establish provisions that necessitate the presence of their representative(s) (i.e. director(s)) for Board meetings to be considered quorate. This ensures that board decisions cannot be made without representation from each shareholder, including minority shareholders. However, the deed of incorporation must include quorum default provisions, which state that if the meeting fails to take place due to the absence of a quorum (i.e. the representative of the minority shareholder is not present) the quorum requirements for the next meeting will be reduced. This adjustment ensures that the attendance of the minority shareholder’s representative is not mandatory for the meeting to be considered quorate.

Quorum for Shareholders’ Meetings: The deed of incorporation may be modified by a minority shareholder to incorporate additional safeguards. These safeguards may include the requirement for the minority shareholder’s representative(s) to be part of the quorum for shareholders’ meetings, as well as receiving sufficient notice and information prior to such meetings. The purpose of such provisions is to ensure the minority shareholder’s involvement in the decision-making process, even if they are unable to outvote the majority shareholder. The quorum default provisions also apply.

 Reserved Matters for the Approval of Minority Shareholders: To ensure the protection of minority shareholders, it is crucial to establish mechanisms that prevent certain fundamental actions from being taken without the explicit consent of all shareholders, including the minority shareholders and their appointees. Alternatively, such actions may require a special majority or simple majority vote. In the context of a joint venture, this may entail securing the approval of specific minority shareholders (or representative(s)). These protective measures can be implemented either at the board level, where the unanimous consent of all directors is indispensable, or at the shareholder level, where the unanimous consent of all shareholders may be mandated.

Lock-in Period: When establishing a joint venture, it is crucial for all shareholders to prioritize the establishment and growth of the business. If a joint venture party were prematurely exit, it would disproportionately affect a minority shareholder who may have joined the venture with the expectation of benefiting from the majority shareholder’s involvement, expertise and resources. To address this concern, it may be necessary for the minority shareholder to request an initial lock-in period wherein the transfer of shares is strictly prohibited.

Put Option: In certain defined circumstances, a minority shareholder may seek to exercise a “put option” to oblige the majority shareholder to purchase their shares, thereby avoiding being bound to the joint venture. This can be a valuable recourse for a minority shareholder who disagrees with the majority shareholder and wishes to exit the joint venture company. Such deadlock situations can arise in joint ventures involving majority and minority shareholders, where unanimous decisions or inconclusive outcomes occur due to multiple joint venture parties. To address this, the deed of incorporation must outline a dispute resolution process. In cases of persistent deadlock, the majority shareholder’s shares based on a predetermined formula, effectively granting the minority shareholder a put option. The triggers for activating this put option will be carefully defined, along with a mechanism or formula for determining the share price. The deed of incorporation may incorporate a “fair price” determination mechanism, typically stipulating that the valuation of any minority shareholder’s shares should reflect their proportionate value to the joint venture company’s entire share capital. The valuation should be carried out by an independent, reputable firm of accountants.

Price Protection Provisions: This provision entails a reduction (without any cost to the equity holder) in the exercise or conversion price of the equity holder’s convertible securities. Simultaneously, the number of shares underlying those securities is proportionately increased. This adjustment occurs when common shares are subsequently issued (either directly or indirectly through options or convertible securities) as part of a down-round investment. A down-round investment refers to an investment made at a valuation lower than the equity holder’s original purchase price (or sometimes the current fair market value). Purchase price anti-dilution provisions can be implemented in two ways: (a) Weighted average: The applicable price is reduced to the weighted average price at which the corporation sold its securities. This includes the sale of securities during the down-round issuance; or (b) Full ratchet: The applicable price is reduced to the price utilized in the down-round issuance.

Concluding Remarks 

Safeguarding the rights of minority shareholders in joint ventures is crucial due to the inherent control imbalance between majority and minority shareholders. While majority shareholders wield significant authority, minority shareholders often find themselves lacking influence in decision-making processes. Shareholders’ agreements and the company’s deed of incorporation may include the provisions essential for the protection of minority shareholders. By embracing these provisions, bot majority and minority shareholders contribute to a more equitable and successful joint venture. Ultimately, these protective measures foster collaboration and enable all stakeholders to shape the future of the joint venture effectively. 


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