爱华网Asset transfers on overly favourable terms to other companies owned by controlling shareholders is another tunneling tactic. Granting of specific contracts to particular companies on favourable terms and the transfer of liabilities can all benefit controlling shareholders over minority ones. Transfer pricing tactics between companies owned by the same controlling shareholder can exploit both minority shareholders and creditors.
One way in which controlling shareholders can tunnel a company relates to capital increases. It is not uncommon for new shares in a company to be issued and sold either directly or through a related party to the controlling shareholder on favourable terms. This not only provides a built in premium for the dominant party, but also decreases the holding of minority shareholders. We return to this issue below.
In kind contributions to controlling shareholders can also extract resources from a company even before they reach the bottom line, reducing profitability and pidends to be paid. Cars, houses, yachts, luxury ‘business travel’ and other perks may be given to controlling shareholders but not others. In addition, the controlling shareholder, along with friends and relatives may also have management positions for which they are overcompensated. Investment decisions may reflect the personal interests of the controlling shareholders and low profit subsidiaries of the company created in order to satisfy the whims of children of the founder.
The greatest opportunity for minority shareholders to come together and have their voices heard is the general meeting of the company where (in theory) shareholders can use their fundamental rights as owners of the company to participate in decision-making. Unfortunately, such meetings often do not live up to that promise. There have been cases in some Asian countries of shareholders actually being kept away from meetings, meetings being held unannounced, locations changed at the last minute and not communicated and security checks being so tight as to not allow members past doors into the meeting.
But the ultimate question is whether the shareholder general meeting even matters if there exists a controlling shareholder. By definition the controlling shareholder can muster enough votes to control the outcomes of the meeting. But there are ways of overcoming this built-in bias. One is to use super-majority requirements for certain major transaction of important strategic company decisions. A threshold of achieving at least two-thirds or even 75% of the vote might be introduced in such circumstances.
Major transactions, in particular, require special treatment when it comes to developing corporate governance guidelines because these can have a huge impact on the company, its employees and shareholders. In addition, so called related-party transactions that directly involve the interests of members of the board, management or the controlling shareholder must be subject to special provisions. Company law and, with respect to disclosure, securities regulations should normally have additional governance requirements for such transactions. It may well be that where there is a personal benefit to be gained out of a transaction, that beneficiary (including controlling shareholders) should not take place in the decision-making surrounding it.
In Singapore, accounting standards require the disclosure of related-party relationships and related-party transactions have to be published with financial statements. They require immediate reporting of transactions exceeding 3% of the company’s book value and details of all parties that have an interest in the transaction. For related-party transactions that exceed 5% of the issuer’s book value, shareholder approval is required.
Where there is a major transaction in a company then good corporate governance should grant shareholders appraisal rights linked to that transaction. This means that through a fair and accurate (and often independent) appraisal, shareholders should be able to confirm that a transaction was good for the company and not biased in favour of one interested party. In many countries access to appraisal rights is being broadened, but in others the process is still dependent on shareholders going to court or petitioning regulators to get one carried out. Getting a fair and accurate appraisal is however a challenge if the company chooses who carries it out.
Some countries, most notably Korea, also provide shareholders with dissenter rights if they vote against a particular proposal at the general meeting but it is still pushed through by a majority of the voters. Under such circumstances dissenting shareholders have the right to sell their shares back to the company at the price prevalent before the decision was taken (assuming that is higher), for example.
In many countries proxy voting is being encouraged so that the full influence of the minority shareholders can be felt. Too often non-attendance at meetings simply allows the controlling shareholder to dominate the decision-making but if smaller shareholders can act more collectively, then this power can be somewhat mitigated. Another alternative is to introduce a system whereby the controlling shareholder cannot participate in some decisions. For example, a provision to have two directors elected by only minority shareholders may be beneficial. Alternatively, non-executive directors being appointed by minority shareholders alone might be seen as good corporate governance.
As noted above one of the common strategies often adopted by companies in the region is the use of capital increases. Such increases to finance profitable investment opportunities can add significant value to a company, above and beyond the initial investment, if there are strong synergies involved. But controlling shareholders can also use changes in share capital to dilute the equity of minority shareholders. Often a controlling shareholder (or other insider) will arrange for new shares to be sold at a discount for themselves and/or associated parties. In particular, in kind share contributions where equity is issued in return for assets (often from an associated company of the controlling shareholder) are often used to dilute the holdings of minority shareholders.
The very nature of capital increases and their potential for abuse means that access to this kind of strategy needs to be the subject of tight control and scrutiny within the corporate governance framework. Shareholder approval should be required and shareholders should often be given appraisal rights, particularly when in kind share issues are being used. Many countries now also have pre-emptive rights that give all shareholders the right to participate in a capital increase on equal terms, although this may still be a problem when minority shareholders lack access to further funds.
One of the biggest impacts on shareholders involves the change of the control of a company. So-called control transactions can include the sale of the controlling interest in a company by the controlling shareholder, the sale of the whole company and a ‘tender offer’ where a third party buys up enough dispersed shares to become the controlling shareholder. A change in the control of a company is a serious issue for governance because of a perception of unfairness when a controlling shareholder benefits more than other shareholders. This applies, in particular, when a controlling shareholder is able to sell the controlling shares at a premium above the market price for the shares, precisely because the new owner get control of the whole company and not just the share block. This may not make other shareholders worse off in the sort run, but it is quite likely that the new owner will want to recoup some of the price paid through some degree of tunneling or other more direct financial transfer.
The sale of the whole company, where minority shareholders are forced to sell their shares or exchange them for shares in the purchasing company is common in emerging markets as industry consolidation occurs. Such deals should normally be subjected to super-majority voting. However, where a company is being sold to another company owned by the majority shareholder (often in order to de-list it) there has to be special protection for shareholders. If shares are transferred from a publicly listed company to a private de-listed company then they can be difficult to sell. In such circumstances they may have to be written guarantees for the controlling shareholder to buy out minority shareholder at pre-purchase prices.
As we have seen, it is families in Asia that are most often the controlling shareholders of large listed (and other) companies. But there is another type of controlling stakeholder leading to some considerable concerns about corporate governance and this is the state. The state is the controlling shareholder in hundreds of publicly listed companies in China and India. These are often some of the largest companies by revenue, assets and employment and commonly have a strategic function in the economy (e.g. air travel, banking and utilities).
Many governments have maintained ‘golden shares’ in privatized companies in order to influence the major decisions of companies that are perceived to be natural monopolies or have large public impacts. In theory, privatizing a company and keeping a ‘golden share’ can ensure high levels of corporate governance in a business environment where there may be an inadequate regulatory framework, while giving the company financial independence. However, in Asia, government representatives sitting on boards of companies have been part of some serious cases of corruption and dishonesty such that the interests of minority shareholders have been abused. Such abuse of controlling state interests in privatized companies remains a major challenge in the region.
In China there have been cases where local governments have been able to force companies to operate in ways that are not in their interest. The highly profitable Kelon company, making refrigerators, was forced to takeover a loss making state owned air-conditioning manufacturer at the end of the 1990s. When director complained, they were sacked and replaced and the company was rapidly ruined in the process. Even Haier, one of China’s biggest brand names, is now threatened by local government intervention, preventing it in its plans to push forward with a management buy-out.
Clearly, dealing with dominant and controlling shareholders is a very important part of corporate governance in the Asia-Pacific region where many companies are dominated by families and other interests. Protecting the rights of minority shareholders is a key challenge. But there are other important aspects of corporate governance to be considered. These include the role of regulations and regulators, the role of directors and responsibility towards other stakeholders (including employees).
In the second part of this article we continue to examine issues of corporate governance in the Asia-Pacific region. In the first part of the piece we examined the dominance of many companies in the region by controlling shareholders (often families). We now consider other aspects of governance with an emphasis on regulation, the role of directors and the involvement of other stakeholders.
Increasingly, in the Asia-Pacific region we are seeing many countries introducing new laws and regulations that seem to offer protection of shareholders and other stakeholders. However, such laws and regulations are only effective if enforced. The fact that a regulatory environment has been introduced does not necessarily result in good corporate governance practices being introduced, therefore. There is a need therefore to strengthen the role of regulators, including securities regulators.
It is, of course, ultimately the role of the judiciary to uphold the law. But in an Asian context it is the judiciary itself where the problem often arises. Corruption within the judiciary is commonplace in some countries and politically appointed judges do not make for independent arbiters. This is clearly an area requiring considerable attention. Notwithstanding a weak judicial system in some countries, however, there is still the potential to use the law to force companies (and particularly their directors) to improve their corporate governance practices.
One way in which the legal system might be effectively used is to empower shareholders by allowing them to act collectively against companies that damage their interests. Law suits filed against board members are becoming more common and in some countries, frameworks are being put in place to make this easier. For example, in China the Supreme People’s Court has recently allowed for shareholder suits in cases of fraud. The duties of directors are clearly being spelled out in India, Malaysia, Singapore and Hong Kong to provide clear guidance as to what represents unacceptable behaviour within the company.
In mainland China and in Taiwan (and also being considered in Korea) class action law suits are now allowed to be taken out by shareholders against companies. This allows for direct payment of damages to shareholders. Although this is a mechanism capable of protecting the interests of minority shareholders, the introduction of class action law suits remains controversial. The main worry is about the abuse of such a system by so-called “green-mail” where lawyers, not shareholders, seek to uncover all the mistakes of directors and file class action law suits seeking fees and out of court settlements for cases of dubious merit.
