Canadian Finance Blog

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Shareholder Rights: Do You Really Have Them? Posted: 22 Jan 2011 02:00 AM PST The following excerpt on shareholder rights is from Investing in BRIC Countries, written by Svetlana Borodina and published by McGraw-Hill. Even companies in the most emerging of emerging markets understand these days that enforcement of basic shareholder rights is a priority in attracting Western investment. Shareholder rights have improved remarkably in many of the BRIC countries since the early and middle 1990s through legislation and litigation. Most emerging economies have implemented basic provisions such as ensuring a "one share–one vote" policy, allowing shareholders to nominate and remove directors, providing for rights of first refusal on additional share issuances, and implementing protections against two-tier takeover strategies that result in a new owner buying minorities' shares at a price far less than that offered to the majority owner. In most countries, shareholder rights also cover rules for the annual shareholder meeting and prevent important meetings from being called in a remote town in Siberia or Amazonia on one day's notice. Despite the improvements in recent years, the national statutes and regulatory policies of emerging economies still contain loopholes that may present considerable risks to investors. The significance of these and the exact nature of the risks they entail may differ enormously from one country to another. Russian law, for instance, provides a broad measure of voting rights, yet it has shown itself to be powerless in defending the financial rights of shareholders in complex situations such as a change in control or a squeeze-out. Conversely, Indian law provides a relatively narrow scope of direct voting rights (no recognition of cumulative voting in board elections, for example), yet that country has a stronger track record in protecting the financial rights of minority investors. There also can be a big difference in emerging markets between the law or rule on the books and its enforcement. In many cases legal systems and commercial courts are untested or lack precedents for foreign investors seeking recourse. In fact, many shareholder rights in BRIC countries may be illusory in that they offer only the appearance and not the substance of protection. Partly as a result of regulatory weaknesses, the scope of shareholder rights may differ considerably among individual companies within the same emerging economy. Some companies voluntarily adopt standards of shareholder rights that are higher than those required by law and regulation. In Brazil, for example, companies are allowed to issue nonvoting preference shares with a variable dividend for up to 50% of charter capital. In practice, this arrangement creates a host of governance concerns, since it often is used by founder families to entrench their control while they maintain only a moderate equity interest. However, a growing number of companies (and blockholders) have agreed not to use this form of financing, as they prefer that all equity investors have equal rights. Thus, the Novo Mercado trading floor of the Bovespa exchange now includes over 100 companies that do not have preference shares. Related Posts: What Are Dividends? Non-US Investment Principles Different From Common Investment Advice What Is A Price To Book Ratio (P/B Ratio)? Shareholder Rights: Do You Really Have Them? originally appeared on Canadian Finance Blog on January 22, 2011.

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