Shareholders’ rights; putting the
interest of parties into equilibrium
Abstract
In 2014, Petroliam Nasional Berhad
(“Petronas”) paid RM26 billion in dividends to the company’s main shareholder;
the Malaysian Government. The said dividend was 50% of its profit after tax.
This year, Petronas had committed to pay the same amount to the Government.
However, with the oil price heading to the abyss, the policy of paying the same
amount to its shareholders may hit the profitability of the company. Surely this
policy cannot be sustained if the oil price stays or even lower than this
level. It is a grave concern that the company may have to lessen its reserves;
putting the company not only at risk but it also put the company at a
disadvantage if the company requires expanding in the future. Although it is
good that the company rewards its shareholders, the company needs to balance
the interest of its shareholders and the interest of the company. In this
Article, I will touch on shares, shares, dividend, and the debacle of shareholders
versus company’s interest.
Introduction
When you buy a share in
a company, you have a slice of ownership in a company. A shareholder
will be given a certificate of shares which is a document that enable a
shareholder to show a good prima facie title of his shares in a company.
Section 132D(1) CA 1965, stated
that the directors must get an approval from the company in the general meeting
before the company can issue shares. Issuance of shares refers to the process
starting from the prospectus until the entry of the share in the company’s
register. Being an asset of a company, share capital must be reflected in the
balance sheet. Hence, share capital must have a real value attached to it. A
company cannot give the share with first securing the payment for the said
shares. However, section 54 (2) (b) CA
1965, seems to allowed a company to give its shares to the shareholders for
consideration other than cash.
What is the meaning of
a “share”?
Section 4 of the
Companies Act 1965 (“CA 1965”) defined shares as:-
Share
in the share capital of a corporation and includes stock except where a
distinction between stock and shares is expressed or implied.
Meaning, you are one of
the owner of the company. However, one must remember the Salomon principle
whereby the owner and the company are two separate entities. Hence, you may be
the owner of the company but you do not have a direct control over day-to-day
management of the company.
Section
98 of the CA 1965 explained the nature of shares as “…movable property,
transferable in the manner provided by the articles, and shall not be of the
nature of immovable property”.
CA
1965 describes shares as movable properties and transferable from one
shareholder to another. Although shares are transferable, the liquidity of the
shares; how easy a shareholder to dispose his shares, depends very much on the
type of the company. For a private company, section 15(1)(a) of the CA 1965
restricts the right to transfer the shares. For public companies, it is much
easy for the shareholders to offer and to sell their shares to the public
through the Bursa.
It is natural for any
one making an investment; they would like to enjoy the return from their
investment. For example, if you buy a unit in Amanah Saham Bumiputra (“ASB”),
you are entitled for a dividend. The same when you invest in a company, you
expect the company to share the company’s profit with the shareholders in
paying the dividend. Your entitlement for dividend depends on what type of
shares that you are holding.
Let
us see what different type of shareholders and what they can expect from their
investment. In a limited company, a share gives the holder the right to claim from
the company the following rights:-
(a)
Distribution rights: rights to receive
dividends, rights to repayment of the principal or any surplus asset of the
company on a winding up.
(b)
Control rights: shareholders
have some degree of control over the management of the company’s affairs; that
is the right to vote on decisions affecting the company during the Annual
General Meeting or Extraordinary General Meeting. The most important power of
the shareholders is the power to appoint or remove the company’s directors.
In
general, there are two types of shares.
(1) ordinary
(2) Preferential
- Cumulative
- non cumulative
We
shall look at each type of shares briefly and look at what are the rights
entails each class of shares.
Preference
shares
Section 4 CA 1965 defined
preference shares as shares that does not entitled its holders the right to
vote at AGM or any right to participate beyond a specified amount in any
distribution whether by dividend, or on redemption, in a winding up.
However, the holder of preference
shares will enjoy the following rights:-
(a)
Fixed
dividend;
(b)
During
winding up, preference shareholders will be able to recoup its principal in
priority to ordinary shareholders.
However, the holder of preference
shares is not allowed to vote except when the company did not pay the dividend
to the preference shareholders.
Cumulative preference shares
Preference share may be
cumulative or non cumulative. Cumulative preference shareholder may carry
forward their entitlement to a distribution from this year to next year.
Non -cumulative preference shares
The holder of non-cumulative
preference shares is entitled for the dividend specified for the said year.
However, if the company does not declare any dividend for the non-cumulative
preference shareholders for this year, the shareholder cannot accumulate the non-payment
of this year’s dividend to the next year.
Participating preference shares
The holder of participating
preference shares are entitled to participate in the company’s profit in excess
to the fixed dividends allocated for the preference shares. The right to the
excess fixed dividend must be clearly stated in the company’s memorandum.
Redeemable preference shares
If the company’s article
authorizes it, a company may issue a redeemable preference shares. Meaning,
prior to winding up, a company may make a repayment of the principal to the
preference shareholders.
Ordinary shares
Unlike the preference shares, there
is no specific definition of ordinary shares. It seems that anything that is
not preference shares is an ordinary shares. Despite the lack of safety to the
dividend payment, the ordinary shareholders has the special rights given to attend
general meeting and exercise one vote per share on a poll on any resolution in
a general meeting. The shares that you buy at the stock market are ordinary
shares.
In terms of priority, the
ordinary shareholders are the last in the pecking order. If the company is in
liquidation, the ordinary shareholders will be the last to be compensated. After
the creditors have been paid, the preference shareholders, the shareholders
will be paid the full value of the shares if there is anything left from the
company’s assets.
3.
Class Rights and variation of rights
Section 65 (1) of the CA 1965
stated that:-
If in the
case of a company the share capital of which is divided into different classes
of shares provision is made by the memorandum or articles for authorizing the
variation or abrogation of the rights attached to any class of shares in the
company, subject to the consent of any specified proportion of the holders of
the issued shares of that class or the sanction of a resolution passed at a
separate meeting of holders of those shares, and in pursuance of the said
provision the rights attached to any such class of shares are at any time varied
or abrogated the holders of not less in the aggregate than ten per centum of
the issued shares of that class, may apply to the Court to have the variation
or abrogation cancelled, and, if any such application is made, the variation or
abrogation shall not have effect until confirmed by the Court.
A company under section 65 (1) CA
1965, and under its memorandum and article is at liberty to give different
classes of shares differs in rights, benefits, disabilities, or other matters
like the following matters:-
(a)
voting;
(b)
dividends;
(c)
return
of capitals;
(d)
other
matters.
Variation of class right
The right under classes of shares
only arises if the class rights are created in the memorandum or article of the
company. Variation of rights assumes the existence of the right, then the
rights are varied, and subsequently the variation continued to be enforceable.
Provision of class rights in the
memorandum
If the memorandum of a company
confers class rights, we may argue by virtue of section 21 (1A) CA 1965 that by
passing special resolution, we may alter the memorandum and subsequently
amending the class rights.
Noteworthy, section 21 is a
general provision to alter the memorandum; including the provisions on class
right. However, a general provision cannot be used to alter specific provision
of the memorandum. The alteration may be prohibited if there is a specific
provision in the memorandum that prohibits the alteration of class rights. Furthermore
the new inclusion of subsection (1B) to the Section 21 stated that:
Nothing in
subsection (1A) permits the alteration or deletion of a provision of the
memorandum that relates to rights to which only members included in a
particular class of members are entitled.
If the rights to certain class of
members are provided in the article of the company, the rights can only be
altered by way of special resolution (section 31(1) CA 1965). However, when the
amendments touches on the class rights, Section 21 (1B) of the Act provided
that the amendments can only be varied with the consent of the class concerned.
Statutory Protection
Section 65 (1) CA 1965 –
variation or abrogation affecting of class rights holders can be done if a
specified proportion of the holders of the shares consented or pass a special
resolution. Holders of class shares of not less than 10% may apply to the High
Court to cancel the variation of abrogation.
For the best interest
of the company
How many times we hear the
arguments that the individual or minority interest must be sacrificed for the
best interest of the majority. It happens in a country, it happens in a
community, and it happens in a company.
In 2013, Apple Inc has
more than $100 billion in the Bank. The company wanted to return $45 billion to
shareholders over three years. However, the shareholders want more. David
Einhorn, an activist hedge fund manager wanted the company to return lot more
through new class of preferred stock. The management of the company must
explain to the shareholders why the money should be in the bank rather than
redistributed to the shareholders.
The company needs to
balance the redistribution of profit to the shareholders and the need to grow
the company. The company needs to understand that the shareholders would expect
to enjoy the return for their investment in the company. It is from the
investors money that the company able to use it as capital to grow. The company
must protect the interest of the shareholders especially the minority
shareholders. It is reputational hazardous if the shareholders have to enforce their
rights at the court of law.
At the same time, the
shareholders need to understand, the reason why they invest in a company in the
first place. If the intention is to gain sustainable dividend, then a
reasonable payment of dividend every year is a good investment to the
shareholders. We do not want to milk the cash cow excessively for short-term
profit and killing the cash cow in the process.
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