1.1.4 Oppression

As a point of departure, it is reasonable that a minority shareholder simply has to cope with his vulnerable position within the company. Becoming a minority shareholder is often a deliberate choice. All the same, if the majority shareholder takes advantage of his position, there may be circumstances in which the majority rule leads to unreasonable or unfür consequences. Oppression may arise when the majority shareholder abuses his controlling voting power at the expense of the minority shareholder.

The minority shareholder may also fear oppression in another way. In addition to the majority shareholder, another controlling body within the company is present, namely the management board. The management board may cause oppression as well. In contrast to the majority shareholder, the minority shareholder usually has limited influence over the appointment and dismissal of managing directors. Although from a legal perspective a distinction should be made between the majority shareholder and the management board, in practice the majority shareholder often controls the management board and may represent the same natural person or legal entity.

A classic example of oppression is tunnelling. Further to the definition of Johnson et alia, contained in their well-known paper on this practice, tunnelling can be defined as the transfer of assets and profits out of firms for the benefit of their controlling shareholders.1 Illustrative are the examples mentioned by Johnson et alia. Examples are acts that are obviously illegal, such as theft or fraud. There are also less obvious acts that can be regarded as examples of tunnelling, such as advantageous asset sales to and contracts entered into with the controlling shareholder, excessive executive compensation (assuming that the executive is the controlling shareholder in another capacity), unprofitable Joan guarantees, and the expropriation of corporate opportunities.

Moreover, dilutive share issues, minority freeze-outs, insider trading and creeping acquisitions are put forward as examples of tunnelling by Johnson et alia. A minority freeze-out is created by not distributing profits to a shareholder. Occasionally, freezing out is combined with an increase in directors' remuneration evaporating all profits of the company. As a result, the shares may decrease in value and returns on the investment of the minority shareholder may be withheld.

A further example of oppression may be the dismissal of a minority shareholder as a managing director. This dismissal, usually initiated by the majority shareholder, may place the minority shareholder in a difficult position, as it leaves him without a say in the daily management of the company. This position may be even worse if the dismissed shareholder initially took part in the company as if it were a partnership. This type of company, in which shareholders are also the managing directors of the company, is known as a quasi-partnership.