Management and Control of Your Company
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Shareholders often attempt to involve themselves in a conflict with management over control of corporate issues. These struggles have been met with indecisive success. Shareholders have been demanding changes in the regulations governing the right to the proxy process, while nominating directors. The significant issue, which these instances have brought to limelight, is whether shareholders will gain advantage with increased control over corporate issues. This paper investigates shareholder’s involvement relating to corporate governance and ascertains the control of shareholders, considering both pro and con of some of the above arguments.
1. Propose the rights you would like your shareholders to have.
Shareholders being owners of companies need to play an active role in implementing their rights. They have the power to hold the company directors responsible if they consider that the business is not serving the best interest of the company. By active participation, shareholders can promote integrity, openness, and accountability of the board and thus enhance the practice of powerful corporate governance. Shareholders also possess fundamental right in determining related party dealings, as the Stock Exchange rules demand that controlling shareholders should refrain from voting in such dealings. Shareholders must participate in Annual General Meetings because these meetings render the opportunity to meet, question, and seek information from the board on various issues affecting the company (Bebchuk, 2005).
Shareholders, while attending an Annual General Meeting can participate by inquiring about any issue concerning the company, which the annual report mentions, raising matters pertaining to legal and procedural requirements of annual general meetings, putting forward issues concerning the financial and strategic management of the company. Further, they have the right to inquire about the goals and objectives, future direction of the company and its expansionary and diversification policy. They also possess rights in engaging, straightforward discussion with the board directors on the performance of the company by exerting pressure to be more accountable and transparent. At the annual general meeting, shareholders must question whether the company has served notice of the meeting to the auditor and if the auditor is available at the meeting.
Shareholders also have the right to audit the Register of Directors' Shareholdings at the annual meetings. Shareholders can practice their rights to suggest any resolution for discussion and consideration. They can also demand any statement to be circulated for bringing awareness to other members, while accounting any proposed resolution. At the same time, precaution should be taken that no group of shareholders or shareholder dominate in a meeting and obstruct it in implementing its business (Shivdasani, 1999).
2. Compare the costs and benefits that apply to your company specifically to the decision of whether or not to “go public”.
A company starts its first sale of stock by an initial public offering. Small, ambitious companies wishing to grow further often use an initial public offering as a gateway to generate the capital required for expansion. Although further expansion is beneficial to the company, there are both cost and benefits that arise in the case a company goes public. The company has many advantages when it goes public. The key benefit is in the form of financial benefit by raising capital for its further expansion.
Capital raised can be utilized to finance R&D, capital expenditure, or for paying existing debt. Another key advantage is the increase of public awareness, because IPOs generate publicity and thus popularize the products of the company to new and potential customers. In this way, a company can enhance its market share and IPO can also be used as an exit strategy. Many successful capitalists have capitalized on their companies by using IPOs as an enrichment tool. (Harris, 2007).
Besides, there are many benefits of an IPO, but companie often confront many challenges. One of the most significant challenges is the requirement for added disclosure for company’s investors. Securities Exchange Act of 1934 governs all public companies with respect to periodic financial reporting, which is usually difficult for new public companies. These companies also must satisfy the rules and regulations that SEC constantly monitors. More significantly, for smaller companies, the cost of meeting such regulatory obligations can be extremely high. Some examples of the additional costs include audit fees, financial reporting documents, accounting oversight committees, and investor relation departments. Public companies also face the unpredicted pressure from the market, which may prompt them to look for short-term rather than long-term benefits. The performance activity of company’s management is always under scrutiny, as investors and other stakeholders are constantly looking for rising profits. It can lead management to act beyond their powers and perform certain objectionable practices for boosting revenues. Companies must assess all costs and benefits of IPO before deciding to go public. It usually happens during the time of the underwriting process, as the investment bank assists the company to weigh the pros and cons of a public offering and decide if the IPO serves the interest of the company (Harris, 2007).
3. Discuss the principle, issues associated with conflict of interest and transactions in shares.
A conflict of interest occurs in a direct or indirect transaction, in which a company’s director possesses interest. A conflict of interest in transactions will not be revocable by the company because of the director’s interest in transactions in the case anyone in heading (1) of the following holds validity:
(a) The material fact of the transactions and the director's personal interests were known by the board of directors and the board of directors approved, authorized, or sanctioned the transaction;
(b) The material fact of the transactions and the company’s director interests are available to the shareholders, who have the authorization to vote, and they approved, authorized, or sanctioned the transaction;
(c) The transactions were fair to the company.
(2) For the purpose of this section, a company’s director will possess an indirect interest in the transactions if:
(a) He has a material financial interest in another entity or in which he has involvement or is a partner to the transactions;
(b) He is a director, or trustee in some other company and a part of the transactions and the transactions are or should be viewed by the board of directors of the company.
(3) For the purpose of subsection, as mentioned in (1) (a) of this section, the conflict of interest in transactions will meet approval, authorization, or sanction if it can obtain the conformed majority of the board of directors. Moreover, the board of directors will not gain direct or indirect benefit from such transactions, but such transactions will not be approved, authorized, or sanctioned by a single director as per under this section. If a majority of the company directors, who do not possess direct or indirect motives in the transaction vote to approve, authorize or sanction the transaction, a minimum number of the board of directors will preside for taking action.
The presence of a director having a direct or indirect motive in the transactions will not influence the legality of any action under subsection (1) (a) if the transactions meet approval, authorization, or sanctioned as given in that subsection.
(4) For the purpose of subsection (1) (b) in this section, conflict of interest in the transaction deems to be approved, authorized, or sanctioned if it obtains the referendum of the majority of shares authorized to be considered under this subsection (Demsky, 2003).
Besides, shares owned by the ddirector who possesses a direct or indirect motive in the transactions and shares owned by an entity mentioned in subsection (2)(a) of this section, may not be considered while voting of shareholders to decide whether to approve, authorize, or sanction transactions under subsection (1)(b) of this section.
However, the vote of these shares will be a key factor in deciding if the transactions stand approval under other sections of company law. Under this subsection, a majority of the shares entitled to be considered in a vote on the transactions will comprise a quorum for the intention of taking decision under this section.
4. Explain the tactics that your corporate management will use to defend against takeovers
The widely practiced form of takeover defense is the activation of shareholders’ rights plans, when a potential acquirer declares her intentions. Under this plan, shareholders can buy additional company shares at a fairly discounted price, making it extremely difficult for the raider to acquire control, but today there are extreme repercussions to the poison pill reaction. No doubt, it can certainly complicate matters for the raider; it is often helpful in securing the personal gains of the aristocratic class of corporate executives, rather than its investors or the company. It can also deter the well-intentioned investor and bring down the prices of shares. The destructive scenario of Yahoo! in 2000 supports the disadvantage of a poison pill. The day after Yahoo! declared that it had included a poison pill clause in the company charter, its shares crashed from a level of $118.75 to $6.78. While the defense with a poison pill may defend from unwanted bidders, it can also make more difficult for the shareholders to gain from the announcement of the acquisition. Rights of shareholders can effectively prevent a takeover bid by diluting the raider’s ownership percentage, thus making a takeover condition more difficult and preventing or postponing control of the company and the board. Shareholders quite often suffer when their shares fall after the company includes a poison pill clause in its charter because they are not able to gather profits from such successful takeover bids (Lipton, 2002).
Voting Rights Plans
Companies facing takeover bids may also enforce a voting-rights plan, which prevents shareholders from exercising their full voting powers at a certain fixed point. For example, shareholders who own 20% shares in a company do not have the authority to vote on certain issues, such as the rejection or acceptance of acquisition. The criteria of corporate successor can also spark supermajority voting, which demands that 80% of shareholders must approve a merger, rather than a simple majority of 51%. This requirement can make the task of a raider extremely complicated to acquire a company.
A company can also implement the greenmail method by buying back its all recently acquired shares from the putative acquirer at a much higher price so as to avoid acquisition. This technique was famous during the acquisitions and mergers trends in the 1990s, and solely, its purpose was that the acquirer would not follow another acquisition bid. Since the shares must be bought at a premium price over the acquisition price, this "payout" strategy is the best example showing how shareholders may lose while avoiding a hostile acquisition.
If a determined acquirer unleashes all defenses, then the next possible solution is a white knight. In this mode, a strategic partner joints the target company to increase market capitalization and add value to company’s assets. Such mergers will not only discourage the acquirer, but can be advantageous to shareholders for a short term and also may be so in the long run, if the merger proves to be a strong strategic combination. Although a white knight mode is usually advantageous to shareholders, it does not always happen, especially when the efficiencies of all directors do not materialize and the merger price is low (Bebchuk, 2005).