Posts Tagged ‘Minority rights’

Voice: the perspective of Minority Shareholders

June 18, 2017 1 comment

In firms with concentrated structure, (be it because of the economic stake or as a result of multiple-share capital structures, or as a result of the retail shareholders´apathy), the fact that controlling shareholders can extract private benefits from other shareholders, who still remain passive is appealing, and constitutes the theme for Dov Solomon´s “The voice: the minority shareholder´s perspective”, published in May 2017, (1).


Rational apathy (2) has been identified as a main factor for the passive attitude, and measures addressing it try to (i) increase the benefits arising from participating and voting: rising the influence in the voting outcome pushing institutional investors to vote; (ii) decrease the costs of voting, introducing online voting for instance. If voting reality improved, all other activism tools would be enhanced also, thus its relevance. Read more…


Controlled Companies and Independent Directors

Lucien Bebchuk and Assaf Hamdani have recently published an article, (1) in which they present an alternative to current director elections so that true independence is assured, in particular at controlled companies, where beyond the fact that Nomination Committees are responsible for the selection, controller shareholders usually de facto fully control the procedures so that independence does no actually happen, (as it may be thought to be the case at widely held companies).

Enhanced Independence (as they call it) may emerge if directors are held accountable by public investors; Bebchuk and Hamdani think that not only controller shareholders are to be dispossessed of their complete influence in the nomination process, but that some influence must be granted to public investors, at least regarding some of the independent directors. Their influence can be executed in appointment, reelection and termination decisions.

Bebchuk and Hamdani state that even with director nomination restricted to Nomination Committees populated only with independent directors, controller shareholders have a big say in the process. Independent directors cannot be elected or reelected without their decisive voting rights as shareholders, and also find it difficult to remain when controlling shareholders leave the company. Apart from the social gratitude stemming from having been elected, directors very often suffer the direct or indirect, explicit or not pressure from controller shareholders regarding decisions that affect them and value, particularly related-party transactions. Read more…

Is shareholder activism in controlled firms possible?

July 16, 2015 1 comment

We recently refered to this in our recent post (1), when analyzing the evolution of activism and particularly in Europe where controlled companies are common.

This is the question to which Kobi Kastiel, (a Fellow of the Program on Corporate Governance, and Terence M. Considine Fellow at the Center for Law, Economics and Business, Harvard Law School), tries to answer in a paper published in 2015 (it received The Victor Brudney Prize for June 2015) under the title “Against all Odds: Shareholder Activism, in Controlled Companies”, (1).

The author refers to the New York Times Company and its engagement with shareholders after a 2008 activist campaign led by Harbinger Capital Partners, Firebrand Partners, and Morgan Stanley. The company ended hiring two directors named by activists, selling non-core assets, reducing its Capex, lowering its operational costs, etc. But this company was not the typical target of such a campaign as it remained controlled by the founding family, which according to the broadest opinion should have prevented an activist campaign to succeed, (it would have needed a dispersed stock ownership). 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.


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.