Focus on Corporate Law: Minority Shareholder Rights

It is common for Omani companies to have at least one minority shareholder – i.e., a shareholder that owns less than 50% of the company’s shares. Some companies are formed with minority shareholders as part of the original ownership structure, such as a joint venture company in which the majority partner owns 70% of the shares and the minority partner owns 30% of the shares. Other companies add minority shareholders at a later stage, for example by granting a minority interest to a new investor in exchange for an infusion of capital.

For any such company, minority shareholder rights represent a key corporate governance issue. The minority shareholder will desire legal protections to ensure that the majority shareholder cannot use its voting control over the company to abuse the minority shareholder’s interests. Protections for minority shareholders not only promote fair and responsible governance, but also encourage investment by giving parties comfort to invest in companies in which they will not be able to exert voting control.

Minority shareholder rights mainly come in two forms: (i) rights conferred by statute, and (ii) contractual rights between the minority shareholder and the company’s other shareholders, enshrined either in the company’s charter or in a shareholders’ agreement.

Statutory Rights – the Commercial Companies Law

In Oman, statutory protection for minority shareholders generally is limited to requirements under the Commercial Companies Law that certain key corporate decisions be made by a unanimous vote of the company’s shareholders. The requirement of shareholder unanimity effectively grants the minority shareholder a “blocking right” over the covered actions.

For LLCs

The Commercial Companies Law provides particularly robust blocking rights with respect to limited liability companies, or LLCs. For an LLC, a unanimous shareholder vote is required to:

• increase or reduce the share capital of the company; or
• transform the company into a general or limited partnership.

In addition, the Commercial Companies law states that, unless the company’s constitutive contract provides otherwise, a unanimous shareholder vote is required before the company’s managers:

• sell all or a substantial part of the company’s assets;
• mortgage the company’s assets to secure debts of the company (except in the ordinary course of the company’s business);
• guarantee the debts of any third party (except in the ordinary course of the company’s business); or
• make donations on the company’s behalf above small or customary amounts.

Finally, approval by a majority of the company’s shareholders representing at least 75% of the shares is required for certain other key actions by an LLC, such as amending the constitutive contract, transforming the LLC into a joint stock company, or dissolving the company. Although this “super-majority” voting requirement does not necessarily grant minority shareholders blocking rights, it often will do so in practice – e.g., for minority shareholders that hold a greater than 25% shareholding (in Oman, many minority shareholders have a 30% interest in the LLC), and for smaller minority shareholders that act together and have a combined shareholding in excess of 25%.

For SAOCs

The Commercial Companies Law does not provide such extensive blocking rights for minority shareholders of closed joint-stock companies (“SAOCs”), likely because SAOCs are already subject to more rigorous corporate governance standards. However, the Commercial Companies Law does require that certain key actions by an SAOC be taken at an extraordinary general meeting (“EGM”). This serves to protect minority shareholders, as EGM resolutions must receive 75% of the votes cast in order to be adopted. Capital increases by issuance of preferred shares, or amendments to the company’s articles of association, for example, require approval by an EGM resolution.

Contractual Rights – Company Charter and Shareholders’ Agreement

Beyond the safeguards provided by the Commercial Companies Law, minority shareholders may obtain additional protection from contractual terms agreed to by the company’s other shareholders. Those rights typically would be enshrined either in (i) the company’s charter or (ii) a shareholders’ agreement.

From the perspective of enforceability, it is preferable to include minority shareholder rights in the company’s charter, as in Omani courts it is normally quicker and easier to pursue claims based on violation of the company’s charter than claims based on breach of a shareholders’ agreement. However, as a practical matter, it may be difficult for the minority shareholder to include the provisions it desires in the company’s charter, as the Omani Ministry of Commerce and Industry is often reluctant to permit a company to deviate significantly from the terms of the model charter that is used for registration purposes.

Thus, it is common for minority shareholders to insist on entering into a separate contract with the company’s other shareholders to set out protections for the minority shareholder. This contract, called a shareholders’ agreement, typically will include provisions on such matters as:

• the right of the minority shareholder to appoint a given number of the members of the company’s board of directors;
• the allocation of profits, liabilities, roles and responsibilities among the various shareholders;
• heightened shareholder approval requirements (e.g., unanimity or super-majority) for the company to take particular actions; or
• dispute resolution procedures to be followed in the event of disagreements between the shareholders.

Company charters and shareholders’ agreements are key legal documents that should be meticulously crafted and reviewed to protect shareholders’ rights. We strongly recommend that companies and investors seek professional legal advice in preparing such documents.