What is Golden Shares?
Golden shares are the shares that provide the special power in form of veto power to the holder of the shares. It provides specific voting rights that act as the tiebreaker. These are the normal ordinary shares, holders of which will participate in profit, and in voting just like other shareholders, the only additional thing they get is the special voting rights during the time of tie in voting and to block the hostile takeover of the company.
- ShareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. of such shares have specific veto power during the voting.
- Generally, this can control 51% of the ownership of the company. Such shares will behold by government or government owner corporates or organizations specifically incorporated for specified purposes.
- This concept is very famous in countries like Brazil, the UK, etc., to maintain control over the state-run entities.
- Generally, the holder will be having veto power, the ability to block the major movement of ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company., and the ability to block the takeover.
The government generally maintains the significant stake in the form of golden shares during the time of disinvestment. During the ’80s, this system was very famous in the market; however, later on, the European Union ban this practice.
Such practice is also used by private companies to ensure the control over their group companies and to prevent the hostile takeover by the third party. Many times such holding is maintained to ensure that entity can deliver the purpose and commitment for which it is being incorporated.
Example of Golden shares
ABC limited, 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 initiates public offerings by issuing only 49%. The government maintained a 51% stake in the company. This 51% stake is nothing but the golden shares in its true essence.
- PQR Limited is a state-owned company in the UK incorporated in 1990. As per the articles, the golden shareholder can prevent any shareholder from holding more than 15% of the controlling power of the company.
- In 2010, golden shares were sold by the state as a part of privatizationPrivatizationPrivatization is a measure that transfers ownership and management of public sector industries (those under the control of the government) to the private sector. This can be accomplished through the outright sale of such enterprise's assets or by allowing private individuals to participate in such industry or enterprise by removing restrictions.. With this, the race began for a takeoverTakeoverA takeover is a transaction where the bidder company acquires the target company with or without the management's mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers. of a majority stake in the company. After two years of the takeover, majority stake was taken by 12 different entities owned by the same parent company. It resulted in a hostile takeover.
Effects of Golden shares
- Cap Over the Maximum Voting Rights: Due to this, there is an impact on the presence of 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.
- Resolutions of the General Meeting Require 80% of the Voting Rights: Generally, for specific businesses, 75% of the majority needed to pass the resolution. However, the golden share gives the right to decide the majority and will 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..
- Breach of the Freedom of Establishment: Private enterprises are established to manage business with freedom from government interference. However, the golden share will break such freedom and will not allow the management free of their interference.
- 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.
- To maintain control of the company.
- It helps in playing a pivot role in undertaking critical decisions.
- To ensure that the purpose for which the entity is incorporated is getting fulfilled.
- All significant decisions related to the entity will be passed through the primary investor, who is having full control over the operations.
- It will ensure that the company will not be picked away in a hostile manner by any unwanted third party.
- Ability to Influence the Strategic Decision-Undertaking Process: A golden shareholder can influence all the major decision-making processes that will 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 utmost necessary to have consistent ownership with a correct vision about the business.
- Caps Restricting Substantial Bock Dealing of Stock: In the market, various factors play their role in disrupting the ownership and try to get the majority stake of the company. Golden share ensures that 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 public remains always at the center. So for such a company, it is very much necessary that any material change must be routed through the government. Such assurance can be achieved only by golden shares.
- State Interference in the Management of Private Companies: When the state owns the golden share, they will interfere in the management of the company. It will suffer the performance of the firm. Many scholars have supported this view that there should be negligible or minimal interference of the state in the private firm.
- The public will be Restricted to Invest in the Private Company: Golden shareholders have the right to determine the cap over any kind of investment holding either by individual shareholders or by the groups of shareholders. Such restriction may be directly or indirectly affect the management and operation of the company, which is not a good sign for the progress of the company.
- Ignoring Wisdom of Other Shareholders: This is unfair because they can allow the holder to ignore or overrule or go away from the wishes or wise advice of all the other shareholders. Such a perspective hinders the growth of the corporation.
Golden share plays a significant role in keeping the holding of the company in the restricted mode, thereby keeping the decision making to specific shareholders only, and also ensures 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.
This article has been a guide to What is Golden Shares & its Definition. Here we discuss the purpose of golden shares, examples, and effects along with advantages and disadvantages. You can learn more about from the following articles –