Risk of Being a Minority Shareholder

Risk of Being a Minority Shareholder
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Investing in successful companies may lead to large financial rewards, but investors with a minority share have few safeguards if a company's value shifts rapidly. If the company's value falls, the lack of public desire for the shares may trap the investment. If the company's value rises, majority shareholders may abuse their power and attempt to obtain the shares unethically. Minority shareholders have some legal protection, but court fees are expensive.

Lack of Control

Minority shareholders sometimes disagree with the majority's ideas about a company's direction; for example, the majority may push through a merger with a corporation known to have a questionable reputation. In that case, the minority shareholders would have to accept the merger even if they believed it would lower the value of their shares. Minority shareholders have little influence over a company's direction, and majority shareholders can overrule their objections entirely.

Lack of Liquidity

The public market for minority shares is not strong. If you try to sell minority shares and cannot find a buyer, your investment is trapped. You cannot control the investment's direction by influencing management, and you cannot invest the money in a more profitable venture. In some cases you may receive no dividends or compensation in return for the investment.

Squeezing Out

Majority shareholders have the power to squeeze minority shareholders out of their investment. They use tactics such as firing minority shareholders, lowering their salaries and cutting them from insurance coverage. Their goal is to force minority shareholders to sell their shares for less than fair market value; if the minority shareholders have pressing financial obligations, they may need to sell.

Unethical Treatment

To obtain a minority shareholder's shares, majority shareholders may resort to ethically questionable or even illegal tactics. Examples include changing locks, asking security to escort the shareholders off site and slandering the shareholder's professional reputation. Minority shareholders experiencing these tactics may need legal assistance to end the tactics.