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Archive for the ‘Minority Shareholder Rights’ Category

How are board directors elected? The Spanish case.

January 17, 2016 Leave a comment

In a previous post, (1) I briefly compared the US/Canada system to elect directors to a board with the Spanish case. Not being an expert in the North American system, I only considered the main difference with the Spanish system. In a very recent post (2) I again dealt with the Proxy Access failed legislation and the recent trend in US companies to receive shareholder proposals that aim at introducing it in a company by company case, (modifying the company bylaws).

In this post though, I will try to unveil the Spanish electing system, which in public companies combines proportionality with different majority systems.

First, we will refer to the different qualification of directors according to their origin, as described by the Spanish (CL) Corporate law`s article 529 duodecis (3): Read more…

Minority interests in Management or Controlling Interest Buyouts

In a previous post we dealt with the issue of the protection of minority shareholders, in the case of takeover bids made by controlling shareholders mainly. We will now include Management buyouts in our reasoning.

Should regulatory bodies be charged with the oversight of management or controlling shareholders` buyouts? What are the duties of directors and management in these cases?

Management buyouts are transactions in which managers purchase the shareholders` stakes, and take the company private. Controlling shareholders that hold executive positions have lately used to their advantage their privileged access to information, and their control over disclosures made about the proposed transaction. Cases like Dell, where the founder, still the first executive and a big shareholder, has offered to purchase the shares he does not own, (with the financial help of others) have again raised the concern of whether those transactions are fair, and whether the controlling shareholders, the managers and the board have done all the necessary to protect the interest of minority shareholders.

There is nevertheless a set of best practices that have been built over the last years to help all the actors deploy their activity fairly. These measures include:

–         Creation of a Special Committee of independent directors that, with the help of independent advisors, will initiate so-called Go-Shop activities, in order to search and find alternative offers in the market.

–         A majority of shareholders outside the buyout group should approve the transaction, so as to assure that independent shareholders are the ones to decide.

–         In some cases, the buyout group conditions its bid to the compliance of the previous provisions.

Courts in Delaware usually established a difference between the following two cases:

First, when the buyout group is made of managers but does not yet have a controlling interest in the company. In that case, if a majority of not involved –so, independent- shareholders approved the transaction, the Court would apply the business judgement rule, thus blocking any further court procedure.

Second, when the group is a controlling shareholder. In that case, Courts requires a higher standard, the so-called “Entire fairness review”. This means that Courts will guess if both “fair price and fair dealing” occurred.

Nevertheless, a recent decision by a judge has changed that sharp distinction, in the sense that, whenever there are enough tools in place to remove the conflict, (such as an independent committee and approval by majority of independent shareholders), Court estimates the Entire fairness review does not hold anymore, (MFW Shareholders Litigation).

But are those procedures enough? Do they really protect minority shareholders from abuse?

In Cain and Davidoff, the first measure, (independent committee), and even a board that strongly negotiates with management to obtain the best price for minority shareholders, is said to often produce a higher premium, which was not the case for the second measure, (the majority of the minority to vote in favor). Go-shop provisions don`t show good results either, as too often the shopping is not an actual auction.

Davidoff also points out that premiums in general are lower when the process is led by managers who are not directors, which would recommend a higher protection level.

Peter Henning introduces disclosure as a relevant element, when minority interests are at stake: as the regulatory bodies require certain aspects of the transaction to be disclosed, whenever companies declare or give information to the market, they are forced to be truthful and honest. In the case of Revlon, a Court declared proved that the company received an offer for the minority interests and also the information that it was not fair; after that, the company did everything to avoid receiving formal notices about that fact, so as to avoid its disclosure to the independent directors and the market. Disloyalty includes fraud, but also all activities entailing deceptive effects for third parties, the judge said, which is why the Revlon case is so relevant as it opens the window for a much more active role of Courts in this kind of case.

Anyway, those recent cases are likely to be appealed, so the debate will remain hot for some time.

Based on:

– Steven Davidoff: The Management Buyout Path of Less Resistance, June 2013, NYT.

– Peter J. Henning: A Warning Shot on Management Buyouts, June 2013, NYT.

 

One Share, one Vote.

March 5, 2013 2 comments

According to Professor Colleen Dunlavy of the University of Wisconsin-Madison, corporations were not governed by this principle during the first 19th century decades, so that big shareholders did not hold as much power as they did afterwards. Shareholders were more equally treated than their investments would have suggested. By the middle of the century, democratic norms were pushed and the huge power concentration so  normal at the end of the century started. The change was presumably led by wealthy lobbies, which were able to make legislation passed through.

Anthony Kammer thus argues it is not so rare to propose a different system.

Some realities in the capital markets today lead to rethink the principle. Firstly, decoupling, that is, the split of voting and economic rights, (through derivative markets, share lending activities, and so on), forces to reconsider the principle as “empty voters” have a different interest than “full owners”, the last ones still holding an economic interest and risk, so that the two groups would vote differently. Secondly, a difference might be done between long-term shareholders and short-term ones, so as to avoid the kind of bad behaviors and performance deeply responsible for part of the damages generated by the 2008 financial crisis. Regulation is being pushed in that sense, in the EU and beyond.

In fact several endogenous mechanisms allow some shareholders to hold higher voting rights that those corresponding to their investment and risk exposure: dual-class share systems, pyramidal structures, cross-holdings and so on.

Since the 1990`s, the principle has been dominant, and separation from it has been narrowed, even in those countries where a dual class share system was possible, (Sweden in 2004). But their presence gives room to some empirical studies.

First, what are the reasons for that separation from the principle? Some ideas follow:

–         Shares with higher voting rights usually extract a higher premium in acquisitions.

–         Founders launching an IPO usually want  higher proportion of voting rights than cash-flow risk, having cashed-in for the free-float.

–         Some control of private benefits for controlling shareholders might be guaranteed.

–         The cost of capital tends to be higher in dual-class firms, so a reduced need of funds might be present.

A critical point in assessing this kind of proposal, concerns the effects of the disproportionate allocation of voting rights to some shares. Does it affect shareholder value? Although not empirically irrefutable, it is widely accepted that outside equity loses value, because there is a tendency towards private benefits being extracted by controlling shareholders, and because of a higher cost of capital in these economies/firms.

In terms of social welfare, disproportionate control seems to have certain effects, basically connected to the underdevelopment of the financial markets, (the current political trend is probably populist, or led by recent financial events, so that this fact will probably be disregarded). We also refered to the increase in the cost of capital, so these economies would eventually face a certain underinvestment.

A factor worth being considered is the extent to which the level of disproportion in the allocation of voting rights affects the results, and it appears to be relevant, so that a reduced disproportion could have little shareholder value and welfare effects, and so allow for the current regulatory proposals to have some acceptance.

Consequently, the case for extraordinary allocation of voting rights to long-term shareholders can be made. The aim of enhancing long-term shareholding and behavior is laudable, and the effects could to some extent be disregarded. It exists in some countries and companies, (in Sweden, France, Germany), with a degree of success, (as in the case of LVMH, Volkswagen, L`Oreal, and so on). Some unwanted effects can follow if also extraordinary dividend rights are granted, -as proposed in the EU-, (think of the difficulty to calculate the dividend cost and adequate policy).

But the main discussion concerns whether the measure is the best to guarantee the desired result: a cost and benefit analysis should be done to compare it versus other tools to that purpose.

This post follows several articles or comments in HBR, FT, Anthony Kammer, Adams and Ferreira, and others.

Minority shareholder rights and takeover bids by a controlling shareholder

February 10, 2013 Leave a comment

Dell`s founder (owning 15% of the company) and a fund have recently launched an offer to buy the rest of shares and delist the company, at half its 2006 share price: directors have been sued. Vueling, (the result of a merge between two low cost airlines, one of them a subsidiary of Iberia, today merged with British Airways under IAG) has received an offer by IAG at a € 7 price, when it was recently priced at € 33. Mr Suescun, after selling in an IPO 40% of Corporacion Dermoestetica shares for € 160 million, has recently proposed to repurchase the stake for € 3 million.

 

All these transactions have several things in common: industrial reasons are said to be behind delisting; synergies or cost savings linked to delisting are said to be generated; sometimes certain turnaround processes are said to be easier out of the stock exchange disclosure and information requirements, and the pressure of quarterly results; and most relevantly, there is often a controlling shareholder behind the curtain, leading the transaction, and willing to purchase something he previously sold, for a huge profit against the interest of the minority shareholder.

 

Apart from avoiding companies that can suffer this delisting process, what can shareholders do to fight back these transactions?

 

  1. One of Dell minority shareholders has sued directors for having failed to comply with their legal duty to act in favor of all shareholders` interests, for several reasons: the offer is timed to buy cheap, (after a costly restructuring has been announced), but directors have not offered a large enough premium that would result of the long-term evaluation of the turnaround success probability; in particular Mr. Dell is a the Board Chairman and top executive, so he is accused of abusing his status.

 

  1. Another possibility is the one chosen by an institutional investor in the case of Vueling, which has posted a claim before the Spanish stock market regulator, for the reduced value of the premium offered to minority shareholders. The CNMV has asked IAG`s legal advisor, Uría y Menéndez, for more information. The subsidiary incorporated to launch the offer has denied to include the external valuation of Vueling to the offer, so that it will not delist the company if a higher price was necessary for that. Thus, the offer will not be mandatorily accepted by minority shareholders, as the price in the offer is not considered an “equitative” one. But the price in the market is already higher than the offer, and several funds have strongly bought shares in the hope the price offered will be finally increased. And what`s more, should a shareholder not accept the offer, and should only a very minor stake remain quoted, isn`t illiquidity a great threat to this shareholder`s wealth?

 

 

  1. A different approach would be suggesting that independent directors made the case for all shareholders, so that they defend the minority shareholders right for an equitable price and premium. A way to do this, is to set-up a Committee of independent directors, that would be free to retain their own and non-conflicted legal and financial advisors.The company should provide materials and establish chinese walls if needed. At the end the Committee must be comfortable with the transaction, starting with the price. And the turnaround movement needs to be considered if a equitable price is to be settled.

 

  1. An extension of the previous argument would involve one of the independent directors being a representative of minority shareholders` associations, so as to actually enforce a true defense of their interests.

 

  1. The case of a company and a subsidiary, both quoted in the stock market, could be restrained to the case that free float in the subsidiary exceeds 50%.

It is probably very wise to adopt preventive measures such as the one proposed in bullet 3, 5, and even 4, as it seems quite unrealistic to think small investors can have access to measures in bullets 1 or 2.