Column: Does majority equal minority

Written by Menaka Doshi | Updated: Mar 13 2013, 07:47am hrs
The Companies Bill and Sebi have both taken considerable steps towards empowering minority shareholders

Anil Agarwal tried in 2008 and failed. Last year, in its second attempt, the Agarwal-led Vedanta Resources succeeded in restructuring the group via a scheme of arrangements that merged group companies Sesa Goa and Sterlite.

At the Sesa Goa shareholder meeting, 91.7% of voters present, representing 79.12% of votes in value favoured the merger resolutionpromoter shareholding in Sesa Goa stood at 55.1%.At the Sterlite shareholder meeting, 89.75% of voters present, representing 92% of votes in value favoured the merger resolutionpromoter shareholding stood at 53.3%. In both meetings, the votes cast in favour of the scheme exceeded the minimum requirement (special resolution: greater than 75% by value, greater than 50% by number of those present), despite analysts misgivings about the merger, and proxy advisory firms recommendations that shareholders vote against it.

More recently, analysts and investors protested a hike in royalty payments by Indian cement companies ACC and Ambuja to parent Holcim. But the resolutions needed a simple majority to pass and promoter Holcims more than 50% stake in each company saved the day. In both companies, an overwhelming majority of public shareholders votes were cast against the royalty hike but...

There are dozens of such instances where minority investors in Indian companies have almost won their battles against the majority (read promoter or controlling) shareholders. Now victory seems more certain.

Heres why. The Companies Bill 2012 has taken a giant stepit mandates that all related party transactions (RPTs) need the approval of a majority (at least 75% in value) of disinterested (public) shareholdersthereby reducing the majority shareholder (promoter) to a non-voting bloc. Simply put, elevating the minority to a majority. In the last few months, Sebi has taken that position further. In January, it notified new requirements for the approval of schemes of arrangement proposed by listed companies. All schemes now need the approval of a majority of public shareholders. Sebi says The Scheme shall also provide that the special resolution shall be acted upon only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it. Thats a super majority of the minority!

Then last month, Sebi, in a discussion paper on corporate governance, proposed majority of minority approval for RPTs (aligning with Companies Bill, 2012) and has gone an extra mile by extending the same requirement for the approval of managerial remuneration as well!

In the same discussion paper, the market regulator has also suggested that the controlling shareholder (promoter) sign a relationship agreement with the company. The relationship agreement would determine arms length; restrict the controlling shareholder from interfering in day-to-day management, etc.

The concept is borrowed from British regulation. Till 2005, the UK required all listed controlled companies to sign such agreements. Thereafter the regulatory stance changed to a disclosure-based regime. Interestingly, in October 2012, the FSA suggested re-introducing relationship agreements. It has also proposed that boards of controlled companies be majority independent and that independent shareholders have a larger say in electing independent directors.

The UK follows a comply or explain governance code for listed companies and while independent boards are preferred, it is only now considering mandating them for controlled companies. In the US, in recognition of majority power, controlled companies still enjoy exemptions from key governance requirements. For instance, boards of listed US companies must have a majority of independent directors but that doesnt apply to controlled companies.

Sebi imposed strict governance requirements on listed companies all the way back in 2003 (Clause 49). But, despite the effort to create board independence Indiadominated by family-owned and managed businesseshas continued to witness anti-minority moves by promoters, prompting these new safeguards in company law and Sebi regulations.Curiously, while India is nudging the pendulum away from one extreme of majority dominance, in the US, the pendulum seems to have swung to another extremeof minority dominance, also known as activist investors. Just last week, well known activist investor Carl Icahn launched a campaign to prevent Michael Dell from buying out Dell Computers to take it private. Icahn is using an estimated 6% stake in Dell to gather support for a higher dividend payout. David Einhorn owns 1.3 million of Apples total 939 million shares. That miniscule position has not prevented him from pressuring the company to return more of its $137 billion cash pile to investors via high yield preferred sharesiPrefs! Activist investors like Icahn and Einhorn, Nelson Peltz, Daniel Loeb and now even John Paulsen, pride themselves on taking minority positions in underperforming stocks (and widely held companies) to force major corporate actionssuch as selling business divisions, returning more money to shareholders, etc.

And though they are a growing tribe, activists have rarely found favour with business leaders. Apple CEO Tim Cook reportedly called David Einhorns campaign a silly sideshow. Former GE Chairman & CEO Jack Welch said in a CNBC interview, Look, these guys are after a quick hit. Id blow him off... Id give Einhorn the back of my hand.What Welch calls a quick hit academics refer to as short-termism. Harvard Laws Professor Lucian Bebchuck believes that such activist investors (block holders) play a valuable role in corporate governance. Well known corporate lawyer Marty Lipton (inventor of the poison pill) calls it extortion. In an a note to clients Lipton says, activist hedge funds are preying on American corporations to create short-term increases in the market price of their stock at the expense of long-term value. The UK has also been grappling with short-termism. Not so long ago, Krafts hostile takeover of Cadbury prompted Londons Takeover Panel to briefly consider dis-enfranchising shareholders who acquired shares of the target company during the offer period. Just last week, a report commissioned by the Labour party focused on the ill-effects of short-termism. It concludes by saying Short-termism curtails ambition, inhibits long-term thinking and provides a disincentive to invest in research, new capabilities, products, training, recruitment and skills.The UK is, on the one hand looking to introduce measures to rein in controlling shareholders and on the other, looking for ways to control minority shareholders. I found this excerpt from an Aspen report best bridges the two regulatory ends; The trend toward greater shareholder power...should be accompanied by greater investor and intermediary responsibility.

Its heartening to note that Sebi seems to be thinking on similar lines, even though the regulator currently faces a problem of too little and not too much. Indias institutional investors are infamously mute and a few years ago Sebi had to mandate mutual funds to disclose their voting actions in investee companies. Besides, activists would find it hard to take on a majority shareholder in India. Yet, short-termism finds a mention in Sebis recent corporate governance paper. On the role of institutional shareholders the regulator concludes that It may be deliberated on how to create incentives for institutional investors that invest in equities to become more active in the exercise of their ownership rights, without coercion, without imposing illegitimate costs on them, and given Indias specific situation.

All good as long as Sebi remembers that majority = minority could very easily be read as minority = majority!

The author is corporate editor at CNBC TV18. Views are personal

Equal & Opposite is a column that explores business practices prompted by legal & regulatory action and vice versa