What is highway robbery? In the 19th century - well before my time - a guy, disguised in a mask, demanded your money, your life, or your bald-headed wife, or else! Now it has the cloak of legality.
If an aggressive management shareholder has, say a 45 per cent stake, then buys, or gets support from associates with 35 per cent, he/she can dispossess the ownership rights of the other 20 per cent. Where is the equity in that? Those archaic legal rules could partly change under new EU draft proposals, but not in time to curb any current Irish deals.
There is a legitimate concern that the current spate of MBOs casts the rights of minority shareholders aside. Of course, those pursuing the MBO route are not bandits, but the legal rules are bent to favour them, rather than the ordinary minority shareholder.
Just look at some of the facts. Here, the minority shareholders can literally be screwed with the 80 per cent squeeze-out rights. This was recognised by the Company Law Review Group which recommended abandonment of the rule which distinctly favours the big shareholders. This has yet to be legislated.
Contrast that with the position in Britain. There, there is also a squeeze-out rulebut with a radically different focus. First, there is a 90 per cent squeeze-out rule giving the minority shareholders more rights. Second, and more importantly, that 90 per cent has to be achieved with the outstanding shares; so those owned by the MBO, or associates, are not counted! Can you imagine how some of the recent MBOs, such as Ardagh or now Sherry FitzGerald, would have coped with that rule?
Sherry FitzGerald, for example, is 64 per cent controlled by the management and staff and with the support of Bank of Ireland Asset Management with 12 per cent, the deal is certain to go through. Under the UK rules, and those proposed by the Company Law Reform Group, that 64 per cent would not be counted in the squeeze-out. Proper order.
The EU is obviously aware of the defects, and is looking for changes. The draft EU proposals say that member- states should ensure that an offeror should be able to require all holders "of the remaining securities to sell him those securities at a fair price. Member-states shall introduce this right in one of the following situations: (a) where the offeror holds not less than 90 per cent of the securities and 90 per cent of the offeree company, or (b) where he has acquired, following acceptance of the bid, securities representing not less than 90 per cent of the offered company's securities comprised in the bid." In a liberating move, there is also an option that member-states can set a higher threshold up to 95 per cent.
The deficiencies in our system are glaring. Imagine partly owning an enterprise, and the dominant partner puts a gun (legal) to your head, saying you have to sell out. Under the current company legislation, you have to give up your shareholding, at a price agreed by the majority. And there is little legal recourse. Minority shareholders, of course, have some protection under the company acts, but going down that route can be expensive, particularly as legal advice would be required.
It could be argued that the rights of the masses should prevail. After all, you could have the intolerable situation where a wayward group of disgruntled individuals could hold up the onward corporate march. These adherents could argue that it is better to sweep away these minority dissidents as they hold back the legitimate advances of corporate goals. Also, it could be argued it can be difficult enough to reach the existing squeeze-out target and making it more difficult could provide a degree of inertia that would be negative for enterprise.
MBOs are understandable. Those running these corporations are not responsible for the general collapse in share prices. The Sherry FitzGerald cash offer of 1.95 per share is 60 per cent higher than the pre-offer price, for example, but is below the flotation price of 1.99 four years ago.
In this context it is easy to see why managers are taking the opportunity to go private. But if they have the interest of the minority shareholders in mind, why do they not allow retention rights and offer a share alternative? They rarely do and maybe that explains a certain mindset. What is to stop such companies from using the cash flow to pay off the venture debt, build up the company, and at a later stage do another flotation with a further bonanza for the directors, to the exclusion of the minorities?
Institutional shareholders should provide a buttress. In the larger companies, they often do as it is in their interests to demand fair value. But in the smaller companies they tend to have very little clout. Indeed, if they are investors, they are happy to exit at almost any price.
The rights of minority shareholders should be protected by the independent directors. There is an international change in climate about their role and, in a few cases here, they have disagreed with the main board. But often, their process of election, their cosy-bed relations with the boards, and many of their recent recommendations, does not provide the level of confidence needed.
Would it not be more enlightening, and equitable, for the small shareholder to have an outside arbitration process to hear the arguments of both parties?
There would be no need to set up yet another body; the role of the Take-over Panel could easily be extended. And the mere fact it is there might be sufficient to deter those MBOs whose non-admitted intentions are to screw the minorities.
