What is the Relationship Between the Shareholding Ratio and Shareholder Rights?
In investment contracts, such as those with venture capitalists (VCs), there may be provisions regarding the number of shares issued when the investor invests in a corporation. The issuance of shares affects the shareholders’ ownership ratio, which is a critical factor influencing the corporation’s management rights. Therefore, when a corporation issues shares, it must carefully consider how the ownership ratio will change and how it will affect management rights. In this article, we will explain the importance of maintaining the ownership ratio.
What is Shareholding Ratio?
The shareholding ratio refers to the proportion of shares a shareholder owns in relation to the total number of issued shares of a specific corporation. For instance, in Corporation A that has issued 1,000 shares, if Shareholder X owns 500 shares, the shareholding ratio of Shareholder X in Corporation A would be 500 shares ÷ 1,000 shares × 100 = 50%. In simple terms, the shareholding ratio indicates the extent to which a shareholder owns the company’s shares.
How Shareholding Ratios Affect Shareholder Rights
The rights that shareholders can exercise may vary depending on their shareholding ratio. In this article, we will explain the shareholder rights that are affected by different shareholding ratios.
When a Shareholder Owns One or More Shares
If a shareholder owns one or more shares, they are granted the right to request to view and copy the minutes of the general shareholders’ meeting (Japanese Companies Act, Article 318, Paragraph 4, Item 1). Even if they own just one share, they are affected by the decisions made at the general shareholders’ meeting, and therefore, they are granted the right to request to view and copy the minutes.
Also, if a shareholder owns one or more shares, they can request the corporation to initiate a derivative lawsuit (Japanese Companies Act, Article 847, Paragraph 1). If the corporation does not initiate the derivative lawsuit upon receiving the request, the shareholder who made the request can initiate the derivative lawsuit (Japanese Companies Act, Article 847, Paragraph 3).
When the Shareholding Ratio is 1% (1/100) or More
If a shareholder’s shareholding ratio is 1% (1/100) or more, the shareholder can exercise the right to propose (Japanese Companies Act, Article 303, Paragraph 2, and Article 305, Paragraph 1, proviso).
When the Shareholding Ratio is 3% or More
If a shareholder’s shareholding ratio is 3% or more, the shareholder can exercise the right to request the convocation of a general shareholders’ meeting (Japanese Companies Act, Article 297, Paragraph 1). They are also granted other rights such as the right to request the dismissal of officers (Japanese Companies Act, Article 854, Paragraph 1) and the right to request to view the accounting books (Japanese Companies Act, Article 433, Paragraph 1).
When the Shareholding Ratio Exceeds One-Third
If a shareholder’s shareholding ratio exceeds one-third, the shareholder can refuse a special resolution. According to the Japanese Companies Act, in order to pass a special resolution at a general shareholders’ meeting, shareholders who have more than half of the voting rights that can be exercised at the meeting must be present, and the resolution must be passed by a majority of two-thirds or more of the voting rights of the shareholders present (Japanese Companies Act, Article 309, Paragraph 2).
Considering this provision, if a shareholder with a shareholding ratio exceeding 33% opposes, it becomes impossible to pass a special resolution.
This state where a specific shareholder with a shareholding ratio exceeding 33% can refuse a special resolution on their own is sometimes referred to as having a “veto right”.
Special resolutions are procedures required for important actions for a corporation, such as mergers, company splits, share exchanges, share transfers, entire business transfers, changes to the articles of incorporation, dismissal of auditors, and preferential issuance of new shares. Therefore, being able to refuse a special resolution holds significant meaning in the management of a shareholder company.
When Holding a Majority of Voting Rights
If a shareholder holds a majority of voting rights, they can appoint and dismiss officers. According to Article 341 of the Japanese Companies Act, “A resolution of a general shareholders’ meeting to appoint or dismiss an officer must be passed by shareholders who have more than half of the voting rights that can be exercised (or more than one-third if specified in the articles of incorporation), and by more than half of the voting rights of the shareholders present (or more if specified in the articles of incorporation).”
In other words, if a specific shareholder holds a majority of shares, they can appoint and dismiss officers. The appointment and dismissal of officers are extremely important matters that affect the management rights of a corporation, and maintaining a majority of shares is important for maintaining management rights.
What Percentage of Shareholding is Necessary to Maintain Management Rights?
So, what percentage of shareholding is necessary to maintain management rights? As mentioned earlier, the appointment and dismissal of officers can be done if you have a majority of voting rights. However, to maintain management rights, a majority is not enough, and it is necessary to have more than two-thirds of the shareholding ratio. When a corporation performs important actions, a special resolution is required as mentioned earlier. Therefore, to maintain management rights, it is necessary to have more than two-thirds of the shareholding ratio.
Handling Situations Where the Shareholding Ratio is Less Than Two-Thirds
So, how should one respond if the shareholding ratio is less than two-thirds in order to maintain management rights? If the management team’s shareholding ratio is low, it becomes necessary to respect the opinions of other shareholders.
Therefore, it is important to absorb the opinions of other shareholders and constantly build good relationships with them. As a management team, you may want to maintain your management rights, but listening to the opinions of other shareholders and managing the company could potentially lead the company in a better direction. Therefore, when the shareholding ratio is less than two-thirds, it is important to respond in a way that builds a good relationship with other shareholders.
Methods of Raising Funds Without Affecting Shareholding Ratios
For the operation of a corporation, capital is indispensable, and fundraising is extremely important. When it comes to methods of fundraising, one can consider receiving investments from investors such as VCs and issuing shares. However, the method of issuing shares naturally affects the shareholding ratio. Therefore, it is also conceivable to raise funds by methods that do not affect the shareholding ratio. For example, the following methods can be considered for fundraising without affecting the shareholding ratio.
The method of raising funds by issuing shares is called equity finance, but asset finance and debt finance do not involve issuing shares.
- Asset Finance (Japanese Asset Finance)
- Debt Finance (Japanese Debt Finance)
Summary: Explanations on Shareholding Ratios and Shareholders’ Rights
We have discussed the importance of maintaining a shareholding ratio. By maintaining your shareholding ratio, you can exercise various rights. Therefore, it is important to first understand what rights you can exercise depending on the level of shareholding ratio you hold. Also, if the management’s shareholding ratio falls below two-thirds, it is important to respond in a way that builds a good relationship with other shareholders to maintain control of the company. Matters related to the shareholding ratio require specialized knowledge such as understanding the Japanese Companies Act, so if you have any concerns about the shareholding ratio, please consult a lawyer.