By Lilian Taylor – lilian.taylor@ethicalboardroom.com
Earlier this year, London’s Financial Conduct Authority responded to concerns across the investment community about the position of smaller investors in large companies, with a recent change in rules to allow greater powers for minority shareholders. The move had been designed to strengthen and protect the voice of small investors, equipping them with increased voting rights and a larger scope of influence over important decisions. The changes came in the wake of widespread apprehensions about the governance of listed companies rule by a controlling shareholder, aiming to allow these companies to be run with greater independence from their controlling shareholders, and ultimately prevent the kind of corporate governance scandals which have marred the industry in recent years.
Enforced this May, the new changes would introduce greater measures of shareholder protection across three main areas: to give importance to the voice of minorities when the behaviour of controlling parties is called into question; to increase voting power for independent shareholders for elections of directors and improve the strategic role of independent, non-executive directors; and in circumstances where a premium listed company wishes to cancel its premium listing, thus automatically removing the protection afforded to shareholders by the Premium Listing Regime. In short, minority shareholders should enjoy greater protection from abuse by controlling shareholders, and enhance market integrity.
These changes have been met with some criticism, however, some have warned that the alterations could impact new public offerings and drive business away, while others warn the risk of going from one extreme to another – turning minority protection into minority control. That said, it has still been lauded by many as an historic step in the global investment market, working towards improving regulation and ensuring higher standards for corporate governance. While the recent measures have given the UK the fourth highest ranking for the protection of minority investors, globally, many countries, including the US, France, Germany and China, amongst others, lag far behind. On the international stage, minority shareholders continue to lack any significant voting strength, and minorities must work pro-actively to safeguard their rights and investments, and protect themselves from exposure to risks.
“In short, minority shareholders should enjoy greater protection from abuse by controlling shareholders, and enhance market integrity”
Some of the most common risks faced by minority shareholders include the lack of control and influence that they possess, as well as the lack of liquidity. Minority shareholders will often have to carry on with the actions of majorities, even if there is strong disagreement, as their objections can be easily trampled out. The lack of liquidity available to minority shareholders means that they are often left trapped with an investment, when a buyer cannot be found and the investment cannot progress further. With such little influence to start with, minorities have little sway over management, and neither can they invest their money elsewhere – leaving them, in certain cases, without any dividends or returns at all. The absence of clearly defined rights for minority shareholders also mean that they can become the targets for more aggressive majority parties. Majority shareholders can use current rulings to ‘squeeze out’ minorities, by lowering salaries, cutting them out from insurance coverage and carrying out other activities to pressurize them, in order to force them to sell their shares for a price far below the fair market value. In some extreme cases, minorities have even been the target of illegal, or certainly unethical practices, such as having their reputation slandered in order to oust them out of their role.
Despite the lack of clear legislation to identify and safeguard minority shareholders, those is the US can still enjoy some influence, particularly for those shareholders that are also well-established activist investors, or if their ownership interest remains relatively substantial. For minority shareholders of C corporations in the US, they retain the right to request and view company records, including accounting records, financial statements and minutes of all board of director or shareholder meetings. More importantly, they also have the right to prevent a director from getting involved in transactions, if a conflict of interest is suspected. And if they feel their rights are being impeded in any way, minority shareholders retain the right to sue. One of the most vital areas of regulation and access for minority shareholders that should not be overlooked is the ability to have their voice heard when an acquisition or takeover is proposed. While minorities individually will often lack the clout and control to make an impact, they can circumvent this by agreeing to vote together, to form a majority voting interest through a quasi partnership.
Quasi partnerships between minorities are dependent on mutual confidence and trust, but offer many ways for minorities to protect their own rights as shareholders. In addition to giving minorities a unified voice and greater protection against unfair prejudice from majority shareholders, they can also protect the value of minority investments. While ordinarily minority interest is worth less than the pro rata value, due to the lack of control, a quasi partnership ensures that the pro rata valuation is maintained without discount, in the event that their shares are bought out. They can also elect directors, allowing them to have greater influence over management, as well as presenting initiatives for the overall shareholder vote. While the FCA’s change in direction may lead the way for future protection of minority shareholder rights globally, at present, the current climate still exposes many minorities to serious risks upon their investments. Although these can still pose a threat, it is not impossible for minorities to counter them – through understanding and insight into the business they are investing in, and by taking affirmative steps to protect their own interests.
