July 2021


Pro Governance

Promoting Good Corporate Governance









Bondholder Protection


Merger Regulation


Private Equity

Shareholder Activism

Shareholder Voting

Wider Share Ownership






Merger Regulation

The existing mechanism for transferring ownership of a company as a whole is seriously defective. Investors that buy shares not just for a quick punt but in view of holding them for the long term or until a certain value point is reached are unceremoniously squeezed out in a voting process that is biased in favour of auctioning off a going concern to any bidder who gets a relatively narrow majority of shares.

A simple look at the good old Supply and Demand Graph that will be familiar to all of those who have done an economics degree will demonstrate that any cut-off (bid-price) that may appeal to a simple majority of holders short-changes those investors who would only have planned to sell at a price that is higher than the agreed price.

By disenfranchising the shareowners at the upper end of the Supply Curve investors who would have preferred to hang on to their shares until their target price was reached are forced to forego this premium to the benefit of the acquiring party (equivalent to the concept of 'consumer surplus' in economic theory). The buyer would have to pay substantially more for the totality of the outstanding shares if he would have to pay for all of them the price needed to buy the last 5 or 10% in order to reach the level at which a minority could be 'squeezed' out.

Other factors pushing companies into the hands of new owners and posing substantial risks of conflicts of interest to the detriment of ordinary shareholders are: managements that are promised cut-price equity stakes
or benefit from golden parachutes and option schemes that pay out in the event of a takeover or stake building by (often short-term) investors that have no interest in the long-term future of the business.

Full taxation of capital gains could also be levied on the proceeds of share sales by the old shareholders. At present, sales of company assets are treated favourably in the interest of 'efficient allocation of capital'. Politics thus promotes - possibly inadvertently - merger activity that is also often designed to stifle competition.

Too much influence in the regulation of company mergers is left to industry insiders, especially to the investment banking industry that has a strong vested interest in the promotion - not regulation - of merger activity.

Company Managements should not be allowed to commit shareholders of either bidding or target companies to any transaction until full approval in shareholder meetings is obtained. That should apply to any costs such as 'break fees' as well as access to the target company's books (which put normal shareholders at an information disadvantage).




About Pro Governance

Our Mission is to campaign for the protection of investors and savers by promoting good corporate governance.

We also believe that the wider spread of share ownership is in itself a public good and may sometimes even be preferable to higher economic efficiency.

Shareholders in publicly listed companies are widely dispersed and cannot micro-manage the affairs of the companies they are invested in. The international nature of today's shareholder registers make this also impossible for large institutional investors.

On the other hand, abuses that have developed over the past few years make it imperative that company managements are supervised in a more efficient way.

Tax incentives and institutional constraints have favoured the growth of large institutional investors at the expense of small individual shareholders. This makes it more important than ever that these investors behave like fiduciaries and have the interests of their clients at heart.

This means that the business of money management cannot be treated like any other profit-maximising business. Like the medical, legal or academic professions the interest of the clients has to have priority when critical decisions have to be made with regard to companies the money managers are invested in.

We at Pro-Gov think that the establishment of an effective international forum combining representatives from the national organisations of individual shareholders and investors will be an effective step in the direction of improving corporate governance.

At the moment the corporate Governance discussion is limited to academics, journalists in the quality business press, institutional shareholders and companies and their business associations as well as politicians. The one party missing on the table are the real investors who - with some exceptions - voiceless in the debate.

"The scandal isn't what's illegal; it's what's legal"
(Michael Kinsley)






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