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CA Intermediate · Financial Management and Strategic Management · Scope and Objectives of Financial Management

Under the agency problem in a company, the conflict between majority shareholders and minority shareholders is best illustrated by which situation?

A promoter group approving a related party transaction that benefits itself at the expense of public shareholders illustrates the majority-minority shareholder conflict. Excess perquisites are a manager-shareholder problem, and lender covenants reflect creditor-shareholder conflict.

  1. AManagers award themselves excessive perquisites at company's cost
  2. BLenders impose restrictive covenants on borrowing by the company
  3. CA promoter group approves a related party transaction on terms that benefit the promoters at the expense of public shareholdersCorrect
  4. DShareholders vote to replace the Board after poor performance

Explanation

Conflict between controlling and minority shareholders arises when promoters use control to extract private benefits, such as favourable related party deals. Option A is a manager-shareholder conflict, B is a lender-shareholder conflict, and D is a governance remedy, not a conflict.

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