Golden Shares

What is Golden Shares?

Golden shares provide special power in the form of veto power to the holder of the shares. In addition, it provides specific voting rights that act as a tiebreaker. These are ordinary shares, holders who will participate in profit and voting just like other shareholders. The only additional thing they get is the special voting rights during tie-in voting and to block the company’s hostile takeover.

Explanation

The government generally maintains a significant stake in the form of golden shares during the time of disinvestment. During the 1980s, this system was very famous in the market; however, later on, the European Union banned this practice.

Such practice is also used by private companies to ensure control over their group companies and prevent the third party’s hostile takeover. Often, such holding is maintained to ensure that the entity can deliver the purpose and commitment for which it is being incorporated.

Example of Golden shares

Example #1

ABC Ltd., a British company, provides aeronautical services and makes commercial, military, and agricultural aircraft. The company was a private and state-run company from its inception, and in 2016, it initiated public offerings by issuing only 49%. Nevertheless, the government maintained a 51% stake in the company. This 51% stake is nothing but the golden shares in its true essence.

Example #2

Effects of Golden shares

Golden Shares

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Source: Golden Shares (wallstreetmojo.com)

  1. Cap Over the Maximum Voting Rights: There is an impact on majority shareholders in a meeting. Further, there will be a single majority holder who will decide which are the motions to be passed and which are to be rejected.
  2. Resolutions of the General Meeting Require 80% of the Voting Rights: Generally, 75% of the majority is needed to pass the resolution for specific businesses. However, the golden share gives the right to decide the majority and try to curb the voice of minority interestMinority InterestMinority interest is the investors' stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more.
  3. Breach of the Freedom of Establishment: Private enterprises are established to manage the business with freedom from government interference. However, the golden share will break such freedom and not allow the management to be free of their interference.
  4. Restricted Movement of Capital: Generally, in the liberal economy, capital must be moved freely without any restrictions and limitations. However, the golden share will not allow the free movement of shareholding and will try to maintain the majority stake in the company.

Purpose

  1. To maintain control of the company.
  2. It helps in playing a pivotal role in undertaking critical decisions.
  3. Ensure that the purpose for which the entity is incorporated is fulfilled.
  4. All significant decisions related to the entity will be passed through the primary investor, who has full control over the operations.
  5. It will ensure that the company will not be picked away in a hostile manner by any unwanted third party.

Advantages

  • Ability to Influence the Strategic Decision-Undertaking Process: A golden shareholder can influence all the major decision-making processes to ensure that correct decisions are being taken at the right time based on the right person’s approval.
  • Rights to Control Changes in Ownership: Such shareholding will ensure that there will be no irrelevant and material changes in the ownership will result due to unnecessary movement of stock holding of the company. For the smooth running of the business, it is necessary to have consistent ownership with a correct vision of the business.
  • Caps Restricting Substantial Bock Dealing of Stock: In the market, various factors disrupt the ownership and try to get the majority stake in the company. Golden share ensures such block dealings in the shares of the company.
  • Requirements for Approval of, or Rights to Veto, Changes in Ownership by the Government: For the public sector industries like defense, railways, etc., it is of utmost importance that the benefit of the public always remains at the center. So, such a company must route any material change through the government by golden shares.

Disadvantages

  • State Interference in the Management of Private Companies: When the state owns the golden share, they will interfere in the company’s management. It will affect the performance of the firm. Many scholars have supported this view that there should be negligible or minimal state interference in the private firm.
  • Restriction to the public for investing in the Private Company: Golden shareholders have the right to determine the cap over any investment held either by individual shareholders or by the groups of shareholders. Such restrictions may directly or indirectly affect the management and operation of the company, which is not a good sign for the company’s progress.
  • Ignoring Wisdom of Other Shareholders: This is unfair because it allows the holder to ignore or overrule or go away from all the other shareholders’ wishes or wise advice. Such a perspective hinders the growth of the corporation.

Conclusion

Golden shares play a significant role in keeping the holding of the company in the restricted mode, thereby keeping the decision-making to specific shareholders only and ensuring that the corporation can fulfill the purpose for which it is established. On the flip side, it prevents the voice of minority stake and keeps the company away from the wisdom of minority interest.

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