Extended perspectives: how to become a minority shareholder
By The Forex Review - 03 / March / 22 1147
Dominick Bell
Investing in company stocks can be a good opportunity to expand your business. However, when entering the capital of another business, it is necessary to approach the method of purchasing shares and the size of the stake to protect themselves, as the owner of a part of the company, from claims from other shareholders.
So it happened. Your business thrives on good dividends. The prospects are also very bright. This means that it is time to think about the possibility of investing profits. One option may be to invest in a small stake in a company. Moreover, the choice is yours - which sector of the economy to enter, and what share to buy back. Today, there are many companies on the market ready to attract the so-called portfolio investor by selling him 5-10% of the shares. There are three main ways to buy shares of companies:
- Concluding a contract of sale of shares.
- Acquisition of shares on the stock exchange.
- Purchase of a package due to private placement.
We decided to study the rights of minority shareholders, as well as to consider in more detail all the options for entering the company's capital.
Who is a minority?
The main laws for the investment market are the Law on Joint Stock Companies, the Law on Securities and the Stock Market and the Law on Joint Investment Institutions. None of them defines a term as a minority investor. In practice, this term refers to an investor who owns a package smaller than the control (50% +).
"Understanding whether a shareholder is a minority always depends on the size of the shares of other shareholders and whether they are related parties (acting together). In general, a "minority blocking package" can be called a package of 25% + 1 share, as such a package in accordance with the law on companies can block decisions to change the company's charter (including changes in authorized capital) and termination of the company." - the expert notes.
Rights of minority shareholders
Each shareholder, according to the legislation for joint stock companies, has the following rights:
- Participation in the management of the joint-stock company (voting at the general meeting of shareholders, participation in the executive bodies of the company);
- Receipt of dividends (in proportion to its share in the company's capital, if the meeting decided to accrue and pay dividends);
- Receipt of part of the company's property in case of its liquidation (after all obligations to employees, creditors and the state have been fulfilled)
- Obtaining information about the economic activities of the company;
- Pre-emptive right to purchase shares of additional issue (protection against blurring of the package);
The right to demand that the majority shareholder repurchase shares at their market value if the minority shareholder has voted against the decisions on additional issue, merger, takeover or implementation of a significant transaction.
In addition, when consolidating a number of shares, the minority shareholder also has additional rights:
Proposals of a shareholder holding 5% + shares are subject to mandatory inclusion in the agenda of the meeting, provided that they were submitted no later than 20 days before the meeting.
Holders of 10% + shares have the right to demand the convening of an extraordinary meeting of shareholders.
Shareholders with a 25% + stake may block the decisions of the meeting on amendments to the company's charter and its liquidation.
Owning a 40% + package allows the minority to block the general meeting of shareholders (quorum is 60% + 1 share).
Ways to buy a minority stake
As already mentioned, you can buy a minority stake through such actions.
First, negotiate with business owners in person and enter into a contract of sale of shares. A contract of purchase and sale of securities is concluded with the obligatory participation of a licensed securities trader, which specifies all the terms of the agreement. Under this agreement, the buyer transfers funds to the seller and in turn receives securities (for this purpose the buyer must have an account in securities with the custodian of securities).
The following operations may be carried out without the participation of a trader: donation and inheritance of securities; operations related to the execution of a court decision; acquisition of shares in accordance with the legislation on privatization.
Secondly, you can buy shares of the company you are interested in on the exchange. The problem is that the shares you are interested in on the stock exchange may not be, and even if they are there, they may be too few (ie, you, for example, need a 5% stake, and on the stock exchange you can find only 2% shares that interest you). If the shares in free circulation are not enough, the buyer will have to apply for a purchase to the majority shareholders of the company. To buy the shares you need, you will have to contact a securities trader who works on the stock exchange.
But there is a third option
The third way to become a minority shareholder is the participation of a potential investor in private placement.
The initiator of private placement is usually the company-seller, or rather, its owner. Typically, an investment bank is involved in this project, which advises the company on the feasibility and timeliness of raising capital through private placement, the most likely placement price, the need to restructure the business before placement and conduct a quality and comprehensive audit. The consultants are also preparing an investment memorandum detailing the company's business and prospects and disseminating it to institutional investors. After that, negotiations on the terms of the agreement are held with interested investors, and a book of applications is formed. Finally, the operation itself takes place. For private placement, a formal listing of the company's shares on the stock exchange is also usually carried out, which requires additional technical procedures.
Private placement is a difficult procedure, but large companies today attract investment through private placement. As a rule, private placement agreements take 3-6 months, and sometimes more. It all depends on the company itself (above all, the quality of corporate governance, legal structure and financial reporting), investment bank and investors.
In addition, it is the most expensive option to invest in the company's capital, as you form an offer to buy back shares at a certain price, but several other potential buyers also form their offers. Therefore, if you are interested in entering the company's capital, you will have to form the highest price to beat the offers of competitors.
As a rule, private placements of the company prefer to be carried out on foreign stock exchanges (Warsaw, London, Frankfurt or New York stock exchanges) to attract rich foreign funds to portfolio investors.
Be that as it may, when you decide to invest your funds in a minority stake, you will have to get a competent legal adviser and choose a qualified securities dealer. These partners will help you in the sea of domestic business to choose the right direction and professionally draw up a deal.
For your safety, we have compiled a blacklist of brokers.
