Saturday, 9 January 2010

Minorities be damned

A curious side show to the Alcon deal that I blogged about in my previous post is the treatment of minority shareholders. You may recall that Novartis bought 52% of the shareholding in Alcon, from Nestle, at $180 per share in cash. It had already held 25% bought from Nestle earlier. So it now has 77%. The balance 23% is held by minority shareholders as Alcon is listed in the US.

Novartis has now offered $153 dollars to the minority shareholders, in its own shares (not cash as was paid to Nestle). The minority shareholders are crying foul.

Alcon is a Swiss based company and dictated by Swiss Corporate law. Swiss law does not require minority shareholders to be paid the same amount as the majority shareholders in an acquisition. Most other countries in the world have this provision. Switzerland does not. That’s why Novartis can do what its trying to do.

On first glance this would seem to be an abuse of minority shareholder rights. But wait a moment. Its not so black and white.

The “minority” shareholders” who are making all the noise are hedge funds who bought into Alcon shares recently on the hope of making a quick profit when the acquisition happened (betting that the acquisition price has to be above the market price). Do they deserve any sympathy if they have got the Swiss corporate law wrong. The independent directors in Alcon are trying to protect minority shareholder interests (no doubt fearing law suits), but do speculators like the hedge funds deserve either sympathy or protection ??

Secondly if you were truly a small minority shareholder who subscribed to the Alcon shares when Nestle took it public in 2002, you bought it at $ 33 per share. In 8 years that’s becoming $153. Do you have a problem with that ?

Thirdly, what about the famous “control premium”. There is usually a premium to be paid to the controlling shareholder in a private M&A transaction. This is supposed to be “compensation” for the active role played by the shareholder in managing the company and increasing its value (as distinct from the sleeping shareholder who did nothing ). I know it is dangerous territory and contrary to conventional wisdom to argue shades of colour in capital. But then, this is the principle why Swiss law allows different prices to be paid for different classes of shareholders.

I think Novartis will ultimately be forced to pay the same price to minority shareholders, as they will be forced to by public opinion. For “public” read “market”. Despite being a strong votary of good corporate governance (a key component of which is protection of minority shareholders), I think in this case that would be wrong. The loudly yelling hedge funds deserve no better !


gils said...

nalla vela swissla congress govt ila...irunthiruntha motha novartisayum minoritiesku ezhuthi vachirupaanga!!!

Sandhya Sriram said...

The law has to be black and white. It can either say that i permit a premium for controlling share holder or I dont. It cannot and should not say that depending on my judgement on the profile and intention of the minority shareholder, i decide whether to permit or not. so i guess it is both right to allow and not allow.

the other side is that businesses are best left to the businessman. The public which reads the market also understands that it is the businessman who gives them the profit and in all probability he would do the right thing for the business. but then, the public which drive the market are not public at large but these organized funds and hence they represent the face though not the soul of the so called market opinion.

another thought provoking post from the maestro of blogosphere.

Durga said...

@ gils - LOL! That is a hilarious comparison.

Minority interest is indeed a power lobby by itself. Just that their importance has never been emphasised and was always brushed under the carpet. Few such minorties who are aware of their status indeed take advantage of it. They are literally holding Novartis at ransom! It is how street smart the company is in handling the minority group that ultimately depends on the deal they strike with them.

Ramesh said...

@gils : Trust you to come up with a gem like this !

@Sandhya - I know its dangerous territory to amend for the law to be based on the motives of a group of shareholders. But then in criminal law, motive is everything; aso why not in civil law ??

Absolutely quotable quote from you - "the organised funds represent the face though not the soul of the so called market opinion". Brilliant !

@Durga - Yes minorities are a class by themselves, although in the corporate world they are quite vocal and well aware of their rights.My rambling is really a question of whether the laws are right in affording these protections in a takeover. Take the other extreme in India. The acquirer has to offer the full price to the minority shareholder, but the shareholder has no obligation to tender the shares. This makes it virtually impossible to delist a company.

VA said...

Very true point that the undue benefits do accure sometimes to minorities even when there is no law in place in such cases. I think that we do need to have some provisions in place which prevent oppression and management as majority shareholders may not be saints in a few cases. Though not in this case, as it seems.

Prince said...

The case rests - almost. The minority does not recognize the award of a premium on disposal to the majority group, who it is true, always ran the business but the fruits of this were proportionately shared ie dividend, bonus, rights. Why should the fruit now be cut differently ?

As we all know, here lies the issue. The owner and control parts of equity emerged historically from the family run business as one and indivisible; with these two components now emerging as two and separable, the need for computing value of the controlling premium has surfaced. I believe this is fair and professional and a fair practice would call for transparent equity in the valuation. Let the jury decide on the equitable rewards for ownership and control.

Ramesh said...

@VA - Oh yes, majoriy shareholders are more often sinners than sinned against. But still ....

@Prince - Thanks for your expert comment. Of course Dorothy was much wiser than the Wizard !!

Agree very much with your perspective, but a corollary issue with which I have been struggling with is the motive of the class of the shareholder. I know conventional theory has capital as colourless, but a pure speculator who's betting on a premium on a M&A, doesn't deserve a reward I think. I know its a naively romantic view, but can't help that growing on me !

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