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Common Abuses of Shareholder Rights - Coggle Diagram
Common Abuses of Shareholder Rights
Dilution
CS/GP are usually involved in the allotment of shares so they are best placed to monitor dilution
Can occur in 3 ways
Ownership percentage of voting control is reduced
Pre-share earnings may be cut when disbursed among a greater number of shareholders
Share values may fall depending upon proceeds receiving from selling more shares to investors
Directors must be authorised to allot shares in the company by the shareholders. This authority is usually given at the AGM. There are exemptions, such as for private companies and employee share schemes, although these exemptions may be disapplied in the company's articles of association
Shareholders also have the right of pre-emption in relation tot eh issue of new shares, the shares must be offered first to the existing shareholders in proportion to their existing holdings before they can be offered to others.
Shareholders can only by a resolution in general meeting waive their pre-emption right. It is usual for listed companies to waive this right up to a certain amount each year at the company's AGM
The CS is responsible for ensuring that any resolutions to the allotment of shares or waiving of pre-emption rights are included in the agenda for the AGM. The CS should also ensure that the authorities/waivers requested are in line with what shareholders expect
Many institutional shareholder representative bodies have rules about the level of dilution that is acceptable. in the UK, it is a maximum of 10% of the issues share capital for shares to be allowed non pre-empttively each year
Shareholders also have the right to approve long term incentive schemes, this is because these schemes usually involve the allotment of new shares or the purchase of the company's existing shares in the market, the holding of these shares as treasury shares and then their redistribution. All of which can effect the value of shares held by shareholders
The CS will usually be involved in preparing the plan rules for the long-term incentive schemes and the resolutions to be placed before shareholders at the AGM, they are often involved in the maintenance of these schemes and in disclosures relating to their operation
Tunnelling
An illegal business practice in which a majority shareholder or high level company insider directors company assets or future business to themselves for personal gain
Occurs when the value of the shares held by a shareholder is reduced. This can happen when
The company's assets are sold or transferred to third parties at non-market prices
Value-destroying acquisitions and investments are made to help related companies
Off balance sheet loan guarantees are made
Corporate opportunities are exploited by related companies and not the company itself
The articles are amended to give priority to one set of shareholders over another
The capital structure of the company is amended to give one set of shareholders a priority over another
Changes, including mergers, acquisitions and disposals are made which affect the fundamental legal and de facto bases of the company
Listing Rules requires listed companies to notify their shareholders of certain transactions of more than 5% of the company's value calculated by a series of ratio. Where the transaction value is more than 25%, a shareholder vote is required
The CS should monitor the activities of directors and controlling shareholders to ensure that these types of abuses do not occur
Related party transactions
A transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged
A related party is defined as
A person or close member of that person's family is related to a reporting entity if that person has control, joint control or significant influence over the entity or is a member of its key management personnel
An entity is related to a reporting entity if it is a parent, subsidiary, fellow subsidiary, associate or joint venture of the reporting entity or it is controlled, jointly controlled or significantly influenced or managed by a person who is a related party
If an entity has had related party transactions during the periods covered by the financial statements, IAS requires it to disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements
A company therefore needs to have a policy on related party transactions and a method of collecting information on related party transactions to meet the requirements of IAS
The CS in involved in drafting, implementing and enforcing a policy on related party transactions. Where a related party transaction occurs the CS will advise the director and the board about the consequences. These may range from disclosure in the annual accounts to obtaining shareholder approval
CA2006 sets out provisions in respect of substantial property transactions between a company and its director or a person connected to that director. The provisions state that a company may not transfer to a director or a director to the company, non-cash assets, eg property if its value exceeds 10% of the company's net assets and is more than £5,000 or if the value exceeds £100,000 unless approved by the company in a general meeting
If shareholder approval is required then the CS will have to arrange for the general meeting and the appropriate documentation to be prepared for that meeting
For listed companies, the listing rules sets out safeguards which are intended to prevent a related party from taking advantage of its position and also to prevent any perception that it may have done so. In the LR, a related party means
A person who is, or was within 12 months prior, a substantial shareholder
A person who is, or was within 12 months prior, a director or shadow director of the listed company or of any other company which is its susbsidiary or parent
A person exercising significant influence
An associate of a related party
In the LR, a related party transaction means
A transaction (other than a transaction in the ordinary course of business) between a listed company and a related party
An arrangement pursuant to which a listed company and a related party each investors in or provides finance to, another undertaking or asset
Any other similar transaction or arrangement between a listed company and any other person the purpose and effect of which is to benefit a related party