Rights of the shareholders
While the shareholders are the most important stakeholders of the company, however, very few control the day to day running of the company’s business activities. Therefore, in order to safeguard their interest, the company range multiple rights of the shareholders and provide them the eventual power to influence the company’s decisions. Below we have discussed the rights of the shareholders:
a) Right to attend the general meeting and cast their vote
All the shareholders of the company have the right to receive notice of the general meeting, including, Annual General Meeting(AGM) and Extraordinary General Meetings(EGM). However, this does not include the meeting of the company’s directors.
In addition, the shareholders also have the right to vote at these general meeting on the agenda notified on the invitation of the meeting. However, if a shareholder is unable to attend the meeting, he may appoint a proxy on his/her behalf
b) Right to receive share in the company’s profit
All the shareholders have the right to receive the share in the company’s profit in the form of dividend . However, the decision to declare dividend is the authority of the board of directors.
c) Receive certain documents from the company
All the shareholders have the right to receive the main documents of interest, which includes annual report and accounts. These documents must be issued generally and should also be made available to the shareholder on request. In addition to these documents, shareholders also have the right to receive a copy of written resolution proposed by the directors.
d) Right to inspect corporate books and records
Shareholders also have the right to demand access to the constitutional documents of the company, including memorandum of association and article of association
e) Right to sue for any wrongful acts
If the company’s directors or management enters or transact any malfeasance activity, the shareholders have the right to sue for such wrongful acts.
Pros and Cons of going public
Every entity needs funds to set up or expand its operations. However, the decision to go public is not taken overnight and requires commitment of the financial managers, who are obliged to decide the optimal capital structure. While there are many options to arrange the necessary funds, however, the decision to go public is crucial and should be weighted before any final decision is made. Below we discuss the benefit and cost of going public:
Benefits of going public
a) Access to large scale funds
Going public and issuing equity to the general investors gives access to large scale funds. Accordingly, the firm can also consider the projects that require a high amount of capital commitments.
b) Access to efficient managers
Going public provides a corporate recognition to the company and allows it to hire efficient and experienced managers, which then decide the future path of the company by balancing the need of the profitability and interest of the shareholders.
Costs of going public
a) Dilution of ownership and profits
This is one of the biggest disadvantages for the company going public. Important to note, going public means the company is offering ownership to the outside investors in lieu of their investment. Accordingly, with the company going public, it dilutes its ownership and profits amongst new equity owners. Moreover, If any investor or group of investor attains more than 50% the ownership, it may pose a takeover threat to the original founders of the company.
b) High cost of capital
Unlike debt funds, which is available against the mortgage assets, equity capital doesn’t carry any repayment obligation for the borrowing company. Therefore, since the investors assume high risk on their investment, they demand a higher cost of capital from the company.
c) Regulations and public disclosure
Until the company is privately held, it is not required to disclose the financial results and other corporate activities to the public. However, as soon as the company turns public, it is required to follow stringent regulation of the Security and Exchange Commission(SEC) and public disclosure of all the financial documents for the investors.
Conflict of interest and transaction in shares
Conflict of interest arises from a situation when one party or an organization intend to gain personal gain from the transaction involved. As for transaction in shares, initially,when the firm issue IPO in the primary market, the directors and managers may allot more shares to their private accounts or kin, and may deprive the shareholders from the actual pro-rata allocation.
Anti-takeover defense
Over the years, the activity related to mergers and acquisitions has turned aggressive. While the management may not be concerned when the acquisition is friendly, however, in case of the hostile takeovers, managers can be very creative when it comes to employing defensive measures to resist the takeover. Below we have discussed some of the pre-offer and post offer defensive tacticts that can be employed by our management:
Pre-offer defense tacts:
a) Poison Pill:
These are the extremely effective and tested anti-takeover measures. In its most basic form, the poison pill gives the current shareholders the right to purchase additional shares at a discounted price. With additional equity issue, the firm gets further diluted and this effectively increases the cost of the potential acquirer.
b) Poison Put:
While poison pull focuses on shareholders, poison put focuses on bondholders and gives the authority to the bondholders to demand immediate repayment of their bonds if there is any hostile takeover. Accordingly, the acquirer will have to be ready with additional cash if it is interested in taking over the entity.
c) Staggered Board:
In this strategy,the board of directors are divided into three group of equal size, while each group is selected on staggered term.Accordingly, during the first year, the first group is selected, during the second year, the second group is selected and during the last year, the third group is selected. This is a very meticulous designed anti-takeover strategy with straight forward implications. With the board of directors staggered into three groups, in any particular year, the interested acquirer can win at most one-third of the board seats. Therefore, it will take minimum two years for the acquirer to gain majority control of the board because of the overlapping terms of the board members.
d) Supermajority voting provision:
The management may pass the charter requiring the acquirer to gain support of the shareholders in excess of the simple majority. For example, a resolution may be passed requiring 75% or even 80% of the votes in favor of takeover. Therefore, the acquirer company will fail to gain the majority even if it gains 51% of the majority limit.
e) Restricted Voting Rights
Under this strategy, equity ownership above some benchmark level, i.e. 15% or 20%, results in a loss of voting rights unless approved by the board of directors. This strategy greatly reduces the effectiveness of the tender offer and forces the acquirer to deal with minority shareholders or deal with the board of directors directly.
Important to note, these pre-offer defenses are used in combination with each other to rebound the takeover effort. For instance,in many hostile takeover attempts, the management may utilize restricted voting rights and supermajority provision rights so that the acquirer could lose voting rights while acquiring shares but still need 75% or 80% approval for the merger to go through.
Post-Offer Defense Mechanism
a) Just say no defense:
As soon as the target receives the takeover offer, it can simply say no to the acquirer and officially release a statement to the shareholders discussing why the acquirer’s offer is not in the best interest of the shareholders.
b) Greenmail:
As part of this strategy, the target management plans to pay the potential acquirer through repurchase activity in order to terminate the takeover attempt. It is an agreement that allows the target to repurchase its shares from the acquiring company by offering them premium above the market price. However, when the target management practice this strategy, it yet again enters into the agreement with the acquirer that after the repurchase activity, it will not make yet another takeover attempt for a defined period of time.
c) Share Repurchase:
The target company can submit a tender offer for its own shares. This forces the acquirer company to raise its bid in order to stay competitive with the target’s offer and also increase the use of leverage in the target’s capital structure, which can make the target less attractive takeover candidate.
d) Crown Jewel Defense
As part of this strategy, the target may decide to sell a subsidiary or one major asset, which the acquirer is eyeing, to a third party. The motive here is to turn the takeover ineffective by selling a major asset or subsidiary so that the acquirer surrender the takeover attempt.
e) Pac Man Defense
One of the vintage and bold anti-takeover attempt as part of which, the target management defends itself by making a counter offer to acquire the acquirer itself. However, this strategy will only effective if the target and the acquirer company are of same size and shares similar financial standing.
f) White Knight Defense
As part of this strategy, the target management may ask a third party to come and rescue the company from being taken over. However, the third party chosen or invited should have a good strategic fit with the target and can justify the higher price it will offer to the target. Stated otherwise, white knight defense is a way to introduce bidding war between the acquirer and the third party. However, the intention here is to counter the takeover offer by creating an overpriced environment for the acquirer.
g) White Squire Defense
References
FINRA. (2013). Report on Conflicts of Interest. FINRA.
Kaplan. (2015). Mergers and Acquisitions. In Kaplan, Schweser notes for CFA Exam- Corporate Finance (pp. 351-357). USA: Kaplan Inc.
Velasco, J. (2006). The Fundamental Rights of the Shareholder.
Zickefoose, S. (2014). The advantages and disadvantages of equity financing. Keiter CPA.
