Minority Shareholder Protection Mechanisms: A Modern Legal Theory

Abstract

This research addresses a critical aspect of corporate governance, particularly the Agency Theory, also known as the Theory of Conflicts of Interest. The research elaborates on the issue of conflicts between minority and majority shareholders from a new perspective. The prevailing theories in this area, as established in legal literature, are twofold: the first theory emphasizes judicial protection for minority shareholders, while the second pertains to the veto rights granted to minority shareholders.

In this research, we conducted an analysis of both theories and concluded that they are fundamentally flawed and do not align with the Libyan context. The effectiveness of judicial protection for minority shareholders is contingent upon the efficacy of the judicial system itself; if the latter is ineffective, the protection becomes moot. As for the veto system, it has been criticized on several grounds, particularly its cost to the company, as it relies on the convening of a general assembly meeting. Additionally, it assumes an ideal scenario of disclosure and transparency; if minority shareholders cannot access information relevant to potential conflict of interest, this protective mechanism is rendered ineffective.

Consequently, the research introduces a new theory for protecting minority shareholders, which we refer to as the "Internal Protection Theory for Minority Shareholders." This protection operates on two levels: the primary level involves the formation of a consensus-based internal dispute resolution committee among shareholders. If consensus cannot be achieved, an external authority will intervene to appoint the committee members in dispute. This task has been assigned to a judicial committee operating under the jurisdiction of the Ministry of Economy.

At the secondary level of this protection, we’ve established an administrative committee with judicial authority, also under the Ministry of Economy. This committee will have the power to adjudicate complex disputes, with its rulings being final and subject to no appeal in matters outside the jurisdiction of the internal dispute resolution committee. Additionally, it will have the authority to review decisions from the internal dispute resolution committee that have been contested before it, thus providing an additional layer of assurance.