The Playbook of Majority Shareholders in S.A. Companies: Abuse of Majority Power and Corporate Conflicts

December 2024

Legal Insight

George Psarakis, LL.M. (Mult.), PgCert

Summary: In recent years, we have come across news from the business world about intense disputes among shareholders of Société Anonymes (S.A. companies). The greater the stakes at risk, the more intense the conflict becomes, with courtrooms and General Meetings serving as the battlegrounds. In certain situations, the majority shareholder may attempt to implement specific tactics aimed at gaining a financial advantage. In this article, we will outline the most significant of these, noting in advance that there will be few cases where the law and justice cannot provide a solution.

It is a reality that majority shareholders are sometimes drawn into actions that harm the rights of other shareholders. And, of course, there are many cases of companies that, after the death of their founder, pass into the hands of several heirs, not all of whom share the same willingness to cooperate.

There will also occasionally be times when the majority shareholder considers it fair to reap an even greater share of the profits compared to other shareholders who perhaps do not contribute equally to the company’s operations. In such cases, as well as many others, the majority shareholder will try to implement specific tactics that give them a financial advantage. In this article, we will mention the most important of these tactics, noting in advance that there will be few cases where the law and justice cannot provide a solution.

1. Asset/Cash Flow Tunneling

A majority shareholder and Board Member drafts contracts that disadvantage the S.A., with companies of their own interest, thereby transferring corporate wealth to themselves. For instance, selling assets at prices lower than market value, leasing the S.A.'s properties to affiliated companies under favorable terms, or purchasing assets from companies they own at prices higher than market value.

We have occasionally read in the financial press about allegations of this practice. As an example, consider the allegation by a shareholder of a well-known supermarket chain in 2022, accusing another shareholder and CEO of signing preferential property leasing contracts with a company of their own interest. Similarly, there was a recent example involving a former representative of a listed company who was prosecuted to stand trial for the felony of breach of trust; the charge was that they had entered into a fictitious consulting services contract worth €260,000 on behalf of the S.A.

2. Loan Tunneling

A majority shareholder and Board Member treats the company’s treasury as their own, transferring funds to themselves, often justifying such actions as cash flow assistance or interest-free loans. A recent example published in the press involved shareholders of an S.A. accusing a relative of misappropriating $325.5 million from the company’s undistributed profits.

3. Equity Tunneling

A majority shareholder votes in a General Meeting for a Share Capital Increase of the S.A., while the other shareholders lack the financial means to participate, resulting in a reduction of their stake.

Such a claim was raised by minority shareholders during the 2021 General Meeting of a major construction company, arguing that the administration was “asking for money without a plan” and that this would dilute the shareholding of minority shareholders. Similarly, a majority shareholder may implement tactics leading to the forced exit of the minority, leveraging special provisions on transformations (e.g., mergers by acquisition).

4. Excessive Board Member Compensation

A majority shareholder attending the General Meeting makes decisions for high and disproportionate compensation for Board Members connected to them (or for themselves if they are a Board Member), effectively converting the S.A.’s profits into compensation, leaving minimal amounts for distribution to other shareholders. (Board Member compensation in this manner burdens the administrative expenses of the S.A. and is deducted from its gross revenue.)

5. Non-Distribution of Dividends

A majority shareholder votes in the General Meeting against dividend distribution or in favor of distributing only 10% of the profits (after deducting statutory reserves, etc.), transferring the remaining profits to retained earnings (thus increasing the company’s net equity).

Although this increases the market value of shares, it harms minority shareholders in unlisted companies, who cannot easily liquidate their shares. In other words, even if profits accumulate in an S.A., thereby increasing its net equity and the real value of minority shareholders’ shares, the latter often do not have a market to turn to.

6. Unfair Competition by the Majority Shareholder

A majority shareholder of the S.A. also operates another company, diverting customers and revenue away from the S.A., to the detriment of other shareholders.

The majority shareholder, in principle, is not obliged to refrain from competition. Thus, by exploiting potential business opportunities they learn about through their participation in the S.A., they transfer business profits from the S.A. (where they would have to share them with other shareholders) to another company of their sole interest.

This could also be achieved through other means: e.g., an S.A. managing real estate leases a property it owns at below-market rent, while at the same time, the same tenant pays higher rent for a property owned by the majority shareholder’s company, effectively offsetting the difference at the expense of the S.A. and, consequently, its minority shareholders.

This practice could reach the point where the majority shareholder commercially deactivates the S.A., so they can now operate exclusively through their own company, excluding other shareholders.

How Can These Strategies Be Addressed?

1. Preventive Provisions in the Articles of Association

The most appropriate protection tactic is the provision and inclusion of suitable terms in the S.A.’s Articles of Association and in external shareholder agreements that regulate the aforementioned situations to limit them.

2. Relying on Legal Remedies

If no such foresight exists, minority shareholders must rely on the tools provided by the law. Our courts are familiar with these tactics and can address such disputes with practical and economically sound resolutions. However, a detailed analysis of ways to address these issues will be the subject of a separate article to follow.

3. Beware of Abuses by Minority Shareholders

Finally, we should not forget that corporate disputes may also be viewed from the opposite perspective: there are cases where minority shareholders abuse legal remedies and rights, acting obstructively or abusively to exert undue pressure on the majority shareholder—for example, seeking to be bought out at disproportionately high prices.

Such cases can also be defended against effectively, but one must always remember that engaging in prolonged legal battles carries the risk of paralyzing the company and incurring significant costs without yielding any immediate business benefits.