The rights of their ayes

PUBLISHED : Monday, 26 September, 2011, 12:00am
UPDATED : Monday, 26 September, 2011, 12:00am


When you own something, you get some say on how to control it. This is a bedrock concept of equity and good corporate governance, and one that is undermined by the use of super voting shares.

Holders of super voting shares have a greater say than holders of ordinary shares. They are commonly used by founding shareholders and their families to retain control of a firm.

For example, as at March 31 Google had more than 250 million class-A shares and 69 million class B-shares. Each class-A share represents one vote, and each class-B share represents 10 votes.

The firm's founders, Larry Page and Sergen Brin, together hold 115,000 class-A shares and 54.6 million class-B shares, which represent only 17 per cent of the company's share capital but more than 57 per cent of the voting rights.

Similarly, Rupert Murdoch is able to control 39.7 per cent of the voting rights of News Corporation despite owning only 12.6 per cent of the company's shares through the use of voting and non-voting shares.

Orient-Express, which owns and manages luxury hotels around the world, also has a dual share structure, but with a twist. All the class-B shares, which have 10 times the voting rights of class-A shares and represent about 67 per cent of all voting rights, are held by a wholly owned subsidiary of the company.

As such, management, which has only a small shareholding, controls the company without even having to pay for and own the class-B shares, since they decide how the subsidiary votes. This structure was ruled to be legal by courts in Bermuda, where Orient-Express is incorporated, after being challenged by certain institutional shareholders.

Investors do not like super voting shares. There is no reason that some shares should be more equal than others. Moreover, it allows management to become entrenched by making it difficult to remove them when they are not performing. In the case of Orient-Express, it appears that only the board can remove itself!

When super voting shares are used, the main shareholders' control is greater than their economic stake in the firm. To the extent their interests are not fully aligned with common shareholders, this arrangement can lead to bad governance.

One example can be seen in the use of 'poison pills', which are commonly deployed to defend controlling shareholders with minority interests from hostile takeovers by outside parties.

Poison pills are typically triggered when someone buys or plans to make an offer to buy a big stake in the company, the threshold usually being between 15 per cent and 20 per cent.

When triggered, the arrangement gives existing shareholders the right to buy more shares of the company at a deeply discounted price, diluting the acquirer's stake and increasing their acquisition cost.

This forces acquirers to get the support of the board, which has the right to redeem or remove the poison pill, instead of going directly to shareholders, thereby giving the board more time to find competing buyers and maximise the acquisition price.

Orient-Express has a poison pill under which shareholders are given the right to buy shares of the company or the acquirer at a 50 per cent discount when someone buys a 15 per cent stake or makes an offer to buy 30 per cent of the firm. The Taj Group of India at one point accumulated up to an 11.5 per cent shareholding in Orient-Express with the intention to buy more. As the board also controls majority voting rights in the company, Orient-Express was able to rebuff the Taj Group, which has since cut its interest to about 7 per cent.

Poison pills give directors and controlling shareholders effective veto rights over any potential takeover. There is no evidence the Orient-Express board acted against the interests of minority shareholders in vetoing the Taj Group bid. Just as clearly, however, small investors did not get their full vote on a critical issue with serious money implications.

Khor Un Hun is a former investment banker with extensive experience in advising on mergers and acquisitions and fund-raising in Asia