Minority rights are all the rage these days but, in the case of shareholders, they can be taken too far. In theory, all shareholders have the same rights as each other. In practice, minority shareholders can do little to influence the running of their company.
To give the minority some protection against abuse by a self-interested majority, the law allows them to petition the court if the company’s affairs are being conducted in a manner which is unfairly prejudicial to their interests.
In a takeover, bidders regard it as very important to be able to eliminate minorities. This usually suits minority shareholders because the alternative would be to hold shares for which there is no market in a potentially unlisted company whose destiny is controlled by its new parent.
However, minority holders cannot always be forced to sell in this situation and, by their continued presence, can cause considerable headaches for the bidder. Because of this, a practice has arisen, known as ‘greenmail’ in the City, by which minority shareholders seek to retain their holding in order to force bidders into paying them a large windfall amount of money to achieve outright ownership.
In a recent case (Rock Nominees v. RCO Holdings), an attempt was made to avoid greenmail by selling the company’s operating subsidiaries to one of the bidder’s subsidiaries, putting the company into solvent liquidation and distributing the sale proceeds to all shareholders, including the minorities.
Rock Nominees, the minority shareholder, claimed that this was unfairly prejudicial to its interests because the price paid by the bidder’s subsidiary should have been above market value, to reflect cost savings to be made from merging the two businesses. It also complained that the attempt to gain 100% control in this way was an improper purpose, depriving it of its rights to remain a minority shareholder and to negotiate the price at which it would sell the shares.
The claim was firmly rejected by both the High Court and the Court of Appeal. The Court criticised greenmail as the kind of behaviour which brought the City into disrepute. As well as disapproving of Rock Nominee’s conduct, the court also ruled that the company was not sold at an undervalue: the cost savings were personal to the bidder, because no-one else could have taken advantage of them, and there were no other potential purchasers of the company at the time of sale.
Using this route to eliminate minority shareholders who want to retain their stake may not always be successful. First, any sale must be conducted properly, with an independent valuation process to ensure that the minority shareholders get proper value for their shares.
Second, the conduct of the parties will also be important: where the minority has a less mercenary reason for wanting to retain its shareholding, the court may be more willing to protect its interests. If Manchester United were to face a takeover bid, any attempts by die-hard fans to hang onto their shares may perhaps be a legitimate form of ‘redmail’.