One share, one vote; that’s the norm that rules the corporate decision-making, especially in the representative management of publicly quoted companies. By poll or by show of hands, the size of shareholdings largely influences decisions at the general meetings; minority dissent is registered but the majority consensus carries the vote. That appears to be the equity of the equity holdings. But new rules being proposed by the capital market regulators are set to change the rules of the game-majority shareholders, directors and shareholders with substantial equity stakes will have almost no influence on crucial decisions at special general meetings. Capital Market Editor, Taofik Salako, reports on the wider ramification of such paradigm shift in the context of market and stakeholders’ concerns
Public limited liability companies are owned by several investors, whose shareholdings and stakes in the companies are proportionate to their initial and subsisting capital contributions to the companies’ business operations. While the authorised share capital of a company represents the ceiling of the probable capital that it may seek in the future, fully paid up share capital refers to the capital contributions by shareholders. The fully paid up share capital is the basis for the shareholding structure, which outlines the proportionate shareholdings of each member of the company.
A person in whose name a shareholding is registered is duly recognised as the person with the prima facie authority to take decisions on the shareholding. He exercises all rights relating to the shareholding including voting right, collection of cash payout and scrip issue and many other transactional and managerial decisions. But he also assumes the risks and liability that come with the business operation.
Given the large size of shareholders, a public limited liability company (Plc) is managed by selected representatives of the shareholders. These members of management may also hold or not hold shares. Thus, the management of a company is seen as representing the views and opinions of the multitude. The logic is that since shareholders appoint the board and the board appoints the management, which determines the employment of every other person in the company, the shareholders are the ultimate decision maker. In all these, the underlying maxim is: the larger the capital, the higher the risks and vice versa. Shareholders hold the board and management to account through periodic reports and meetings.
Investors’ meetings are broadly classified into two categories- ordinary general meeting and extra-ordinary general meeting (EGM). Ordinary general meetings, such as annual general meeting, are held to consider ordinary businesses that entail review of operational and status reports and exchange of views by investors and directors without no change to the ownership structure or basic outlines of the company. An EGM is held to enable investors consider and approve a transaction, which usually may lead to changes in ownership or holding structure of the company as well as its basic outlines and existence. Such EGM includes meetings for new or supplementary equity or debt issuance, mergers, acquisitions, shares restructurings and delisting. Issues that come under EGMs often have more pronounced impact and substance on the risk and returns profile of a company and as such EGMs usually generate more interests than ordinary meeting.
At both the ordinary and extra ordinary meetings, decisions are reached by voting; either by show of hands or by more strenuous poll voting. Under the extant laws, voting by show of hands can only take place if all the shareholders agreed to such method; otherwise a dissent to show of hand will automatically lead to poll voting. As such, crucial and contentious issues are usually done by poll voting, equalizing the capital contribution with the number of votes. Many registrars have introduced technologies that allow electronic voting, which further eliminated the possibility of miscalculation or misrepresentation of the majority’s view.
New offside rules
But under new rules currently being reviewed by the Nigerian Stock Exchange (NSE), a version of an idea earlier muted by the Securities and Exchange Commission (SEC), major shareholders, directors and their related persons and institutions may not be allowed to vote at specially-convened meeting for significant public interest transaction that requires approval of shareholders. This, unlike the traditional view of the ‘put-your-mouth-where-your money-is’, will leave such crucial decisions to minority shareholders.
New draft rules on “meeting convened to obtain securities holders approval” being finalized by the Nigerian Stock Exchange (NSE) exclude all related and interested parties, entities, associates and proxies from exercising their voting rights, even where they hold fully-paid shares. The new draft rules represent major paradigm shift from the current practice where such excluded persons and entities are allowed to exercise their voting rights and runs contrary to the general principle of one share or unit, one vote. “Meeting convened to obtain securities holders approval” in capital market parlance generally includes extra-ordinary general meeting (EGM). Many companies refer to EGM as court-ordered meeting, where such meeting requires the prior approval of a court such as meeting for consideration of scheme of merger and acquisition, which requires approval of a Federal High Court.
According to the new rules, where a transaction requires the approval of investors, such approval shall be obtained either prior to the company entering into the transaction or, if completion of the transaction is expressed to be conditional on obtaining such approval, prior to the completion of the transaction. At the meeting, none of each related party, entity or its associate or proxy and each interested person or entity or and its associates or proxy “shall exercise any voting rights in respect of the transaction nor accept appointments as proxies” even though they are holders of fully-paid shares or unit of investment.
Where such persons or entities are representing other unrelated or uninterested persons and entities which are qualified to vote at the meeting, their representations will only be valid if they have specific instructions as to voting, according to the new rules. “The notice convening the meeting shall state that related parties or interested persons shall abstain from exercising any voting rights at the meeting,” the rules stated. Meanwhile, all other rules relating to regulatory approval, notification, publication, documentation, venue, time, period, conduct, rights and privileges and procedures amongst others in respect of general meetings will also apply to EGMs.
While the NSE did not provide descriptive definition of “each related party, entity or its associate or proxy and each interested person or entity or and its associates or proxy”, market operators generally hold that such relate to majority shareholders and management of a company. “By related parties or interested persons, I believe the rule refers to parties related to the majority security holders and the management of the company,” deputy group managing director, BGL Plc, Mr. Chibundu Edozie said.
The rule of the minority
The exclusion of “each related party, entity or its associate or proxy and each interested person or entity or and its associates or proxy” from voting for their holdings appears to imply that such significant corporate decisions would be determined by the minority or non-management investors. For companies with significant bloc shareholdings with majority core investors, it means only shareholders of public float shares will be allowed to vote and determine such significant corporate decisions.
The revised listing rules of the NSE stipulates that the public shall hold a minimum of 20 per cent of each class of equity securities of a company quoted on the main board, 15 per cent of each class of equity securities of a company quoted on the Alternative Securities Market (ASeM) and 10 per cent of each class of equity securities of a dual-listed company. This rule is known in capital market parlance as public float. Public float is technically a synonym of public shareholder and it generally refers to the shares of a quoted company held by ordinary shareholders other than those directly or indirectly held by its parent, subsidiary or associate companies or any subsidiaries or associates of its parent company; its directors who are holding office as directors of the entity and their close family members and any single individual or institutional shareholder holding a statutorily significant stake, which is five per cent and above in Nigeria.
Thus, public shareholders and public float do not include shareholders or shares held directly or indirectly by any executive, director, controlling shareholder or other concentrated, affiliated or family holdings. Unless where specifically outlined, “close family members” in capital market regulatory parlance globally mean spouse, parents, grandparents, biological and adopted children, step-child, brothers, sisters, spouses of biological and adopted children, step-child, brothers and sisters; grandchildren; and any such person who is financially dependent on such directors or major shareholders, who are excluded for the delineation of public float.
Practical implications
If such majority-shareholder barring rule is adopted, it means that foreign and Nigerian majority individual and institutional shareholders, which owns controlling equity stakes in most listed companies not be able to vote on major corporate decisions affecting their companies. For instance, where Alhaji Aliko Dangote, and his related parties-Dangote Industries Limited, family members and associates, who owns majority equity stakes in Dangote Cement and the directors of the cement company envision an ambitious expansion plan that may include mergers and acquisition and capital restructurings and are willing, as major risk takers in the venture, to suppress their immediate urge for returns; they can only push, hope and pray that the minority shareholders, who hold less than five per cent of the company, buy into the vision. Where the minority shareholders-including speculators and short-term investors, prefer the current steady returns and are unwilling to risk any such expansive growth plan, then they can hold up the expansion and turn down the major investors by voting against it.
While the impact may vary according to shareholding structure, the above example will ring through the entire market. Few companies will escape the chain. With the exception of GlaxoSmithKline Consumer Nigeria and Julius Berger Nigeria Plc, which hold less than majority shareholdings, all other foreign investors hold more than 50 per cent controlling majority equity stakes. These major multinationals include Unilever Plc, GlaxoSmithKline, United Kingdom (GSK UK) Plc, PZ Cussons, Nestle SA, Lafarge SA, Heineken NV, Mondel? International, Berger Bilfinger, BOC Holdings, Standard Bank Group, Leventis, Total SA, Mobil Oil Corporation, Siat NV, Affelka SA, Greif International Holdings B.V., United States’ Exxon Mobil Oil Corporation and SAB Miller. For several of the multinationals, minority shareholders with less than 30 per cent equity stakes will determine the growth momentum and there is no guarantee of the duration, motives and identity of these minority shareholders.
Besides Dangote, other individual and institutional core investors will figuratively hand over strategic corporate decisions to the crowd. These include UAC of Nigeria, Vitafoam Nigeria, Chief Samuel Bolarinde, Dr Muhammad Koguna, Dr. Oba Otudeko, Dr Mike Adenuga Jnr, Mr Femi Otedola, Mr Tony Elumelu, Mr. Jim Ovia, the Subomi Baloguns, Fidson’s Fidelis Ayebae, Abdu Samad Rabiu’s BUA, Cutix’s Ajulu Uzodikes, among others.
Impact on entrepreneurship and
investment
General Secretary, Independent Shareholders Association of Nigeria (ISAN), Mr Adebayo Adeleke, said the new rules will be counterproductive as they border on over-regulation of the market.
“Till tomorrow, the rule has not changed: He who pays the piper dictates the tune. That’s what reinforced the concept of poll. You cannot restrain any shareholder-majority or minority, from voting on issues that affect their investment. It will be counterproductive and scare away foreign direct investments,” Adeleke, a director and shareholders’ representative on the Board of May & Baker Nigeria said.
Boardroom icon and chairman of several quoted companies, Chief Olusegun Osunkeye, said such rule barring major investors from voting their shares would be counterproductive to current efforts at wooing foreign and indigenous entrepreneurs to list their companies on the stock market.
According to him, capital market regulators and stakeholders need consider the advantages and disadvantages of such rule within the context of the economic development and state of its capital market.
He said such rule would limit the growth of existing listed companies to minority consideration and expose entrepreneurs to undue influences of portfolio speculators and fund managers whose interests may not be in tandem with the long-term growth plan of the company.
“We are not ripe for such a rule that majority shareholder should not vote its shares. Jurisdictions differ in terms of their development. We should look at such rule in the context of Nigerian economic evolution, it warrants re-examination,” Osunkeye said.
Chibundu Edozie, said such rule runs contrary to underlining entrepreneurial spirit and risks and returns assumptions that drive corporate growth. According to him, besides the pride of ownership that motivates entrepreneur, one important reason for owning a majority equity stake in any company is to be involved in major decisions that can make or break the institution.
He noted that transactions such as mergers and acquisitions have the potential of making the company bigger and more profitable or completely bankrupting the business with significant benefits and losses to the majority owner, depending on the outcome of the transaction. He added that new issues also dilute the ownership structure of the company with profit or loss potential to the owner.
“Because the investor stands to gain or lose based on these decisions, it is fair that the investor that provides the majority capital for the company’s operation and investments contributes to the decision-making. Although the interests of the minority also need to be protected, this can be done through the process of decision-making which must be inclusive and persuasive based on factual information. While a law that seeks to bar majority core investor -like an investor owning the controlling equity stake and management, from voting their shares in support of crucial voting on corporate decision like mergers, acquisitions, new issues etc may have its merit, it also has a significant disadvantage,” Edozie stated.
He outlined that while such majority-shareholder-barring rule may be meritorious in consideration for the protection of the minority interest in the company against dictatorial behaviour and the protection of the company from hawkish tendencies of the majority owner, it will prevent risk-taking by the investors as well as reduce the amount and the number of transactions as nobody would like to provide fund and not be able to make major decisions on how the money is spent.
He urged that the focus of rule-making should be on full disclosure and due process rather than exclusion of critical stakeholders like majority core investor.
“I am inclined to rather support a law that will specify the process to be followed by companies when major decisions are to be made and ensure the protection of minority investors. A law can also be passed to limit the percentage of ownership of companies in sensitive sectors due to national security. Otherwise, I don’t think the proposed law is good for Nigeria or any country for that matter,” Edozie said.
Managing Director, GTI Securities, Mr Tunde Oyekunle, said the risk-return profile of investors should continue to determine corporate decisions and votes should be proportionate to shareholdings.
According to him, all parties that have fully paid shares or their proxies should be allowed to vote at meeting convened to approve resolutions once due compliance with proxy requirement is observed.
A shareholders’ activist and leader, Alhaji Gbadebo Olatokunbo, however said excluding the core investors and directors from voting on their proposals would protect the interest of minority shareholders.
“Issues before EGM were those approved by the board and management of the company, before the presentation to the general house for amendment, approval or rejection. Therefore, since the issues were their ideas, motive, vision and agenda; the other stakeholders should have the right and the opportunity to reject or accept such proposal and such opinion must be respected,” Olatokunbo said.
Market analysts said implementing such rules abridging the voting rights of the majority shareholders may be difficult except the market regulators seek amendment to the Companies and Allied Matters Act (CAMA), which generally serve as the operating legal mainstay for corporate management in Nigeria. According to analysts, while their operating Acts variously empower SEC and NSE to make rules for the market, such rules cannot supplant existing provisions of the law, especially as stipulated under CAMA. They cited the inability of SEC to enforce general compulsion of e-dividend and e-allotment as CAMA still empowers shareholders to receive dividend warrants and share certificates. Besides the legal challenge, the new rule may unduly politiciswe corporate governance and decision-making as directors and core majority shareholders may now have to pass major decisions through third-party windows in order to present such crucial decisions as neutral proposals and to allow them to vote their shares.
Even without such rules that abridge their voting rights and direction of their companies, many core investors that were required by public float rules to sell down or dilute their shareholdings had opted to delist from the NSE. Ecobank Nigeria had delisted due to unwillingness of the parent company to release further shares for public float. In the latest instance, Tourist Company of Nigeria (TCN) Plc, which owns the palatial Federal Palace Hotel & Casino based in Victoria Island, Lagos, has decided to voluntarily delist after the NSE flagged the company for failing to maintain the minimum 20 per cent free float required to sustain its listing at the NSE. TCN had deficiency rate of 18.69 per cent and the core investors would have to divest some 420 million ordinary shares or issue proportionate supplementary shares to dilute their shareholdings.
While the motives of protecting minority shareholders are laudable, market regulators need to balance the minority interests with the majority interests and risks. Shareholders’ interests can generally be protected if market regulators enforce full and transparent disclosures and hold directors and management personally to account for infringements and abuses.
