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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).
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MORE
ON MERGER REGULATION
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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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