An Indonesian mining company offers a contemporary example. Institutional investors bought the company and it became part of a larger one. Ordinary investors found themselves in a vehicle 43 per cent controlled by a major shareholder. Shares worth £14 in May 2011 were recently trading at 203 pence.
Eurasian Natural Resources Corp (ENRC) was taken private by its three founding Kazakh shareholders, who controlled 44 per cent of the equity. The public offering of shares that took place in December 2007 saw the company valued at roughly twice the £3bn they spent to take the company private earlier in 2013. A share worth 540 pence on the offering was worth 217 pence in 2013. Free float, or the number of shares trading in the market was one of several outstanding issues. Would you have wanted to be a minority shareholder in the business?
Majority rule makes sense. It is a principle of democracy. The party with the most votes wins. Problems develop when writing rules to empower minority shareholders. The Financial Conduct Authority realises minority protection cannot become minority control because it dilutes the principle of majority rule.
One solution is to prevent companies from appointing independent directors without the approval of minority investors. Another is giving independent shareholders a veto over transactions between companies and the controlling shareholder. This serves as a level of protection where their independence might be compromised.
Unfortunately, legislation and regulation is often reactive, not proactive. There are always people who find ways to work within the letter of the law, while ignoring the spirit of the legislation. Problems develop, investors are impacted, lawsuits are filed and new regulations must be written to readdress the problem.
Bryce Sanders is president of Perceptive Business Solutions
The main rights of minority shareholders
• The right to inspect corporate records – Minority shareholders have bought a stake in the business, so they should be able to check that it is being run properly. They have the right to see the list of shareholders and make copies, which is important if they want to contact them directly.
• The right to make claims concerning breach of fiduciary duty – Minority shareholders may take a company to court to question strategic decisions that went wrong. Making a ‘derivative claim’ requires approaching the board in writing, stating the reason for the claim. The board then chooses to accept or reject the demand. Reasonable doubt that the board is acting in the shareholders best interest is a plus. Meanwhile, courts understand negative outcomes can often be the unintended consequence of valid business judgment.
• Fiduciary duty of protection – The firm has a responsibility to protect minority shareholders from being oppressed by majority shareholders. This becomes an issue when smaller shareholders are at risk of losing the value of their investment, because they are bought out at a price below fair value.