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Summary of chapter 41 : Choice of corporate structure |
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Shareholder structure explains how power is distributed among a company’s different shareholders or groups of shareholders. Major shareholder categories are as follows: - Minority shareholders, for whom the stock market offers the best protection. A blocking minority gives them a certain degree of control over the company because it allows vetoing certain corporate decisions; - A 50/50 split, the structure of choice in a joint venture; - Employee-shareholders. Normally these shareholders are loyal and non-volatile, lending a degree of stability to the capital; - Family shareholders. This model is in decline. New industries require too much capital for a family-owned structure to be viable. Funding requirements make capital markets become increasingly important; - Financial investors and investment funds, whose objectives vary.
Listing a company on the stock market enables majority shareholders to increase the liquidity of their shares but in return, it requires them to tie their strategy to the scrutiny of the financial community. Defensive measures for maintaining control of a company’s capital carry a cost, because they prevent investors from taking advantage of the potential opportunities a takeover might offer.
These measures include: - Separating management control from financial control through double voting shares, holding companies, limited share partnerships, investment certificates and non-voting shares; - Controlling shareholder changes through right of approval clauses, or pre-emption rights. - Strengthening the position of loyal shareholders by carrying out reserved capital increases, buying back shares, merging, encouraging employees to become shareholders and issuing warrants; - Exploiting legal and regulatory opportunities: specific regulations, voting rights limitations, and poison pills.
Tax considerations aside, whether a group is made up of subsidiaries or divisions depends on control and organisational factors. Listing certain subsidiaries gives the group access to additional equity capital without changing the shareholder structure of the group. But such carve-outs risk to transform the parent company into a financial holding company.
Lastly, remember that shares with low market liquidity, shares of a holding company or conglomerate, or shares without voting rights often trade at discounted values. These discounts increase the cost of capital.
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