Can share voting be structured to protect against takeover?
Suppose Sir Rocco Forte were to succeed in buying back his former company's first-class hotels from Granada, and in floating the business over again. He might be forgiven - second time around - for wanting to insure against a repetition of recent events by securing management control into the distant future. Over the years countless businessmen have had this idea, which is why so many companies coming to the market have issued non-voting shares (or shares with restricted rights), to keep the voting power within the family. Indeed that option still exists. So how, in practice, can the voting structure be designed to safeguard the legacy of a plc's founder and protect his successors against takeover?
'Company law allows you to do virtually anything,' points out Graham Stedman, a partner in the corporate department at City solicitors Theodore Goddard. 'You can have different classes of share with different rights - voting and non-voting and weighted voting - it's not a problem.' Nor does the London Stock Exchange worry if various classes of share carry different powers. And votes may certainly be closely controlled. The rules say only that, whatever the class to be listed, 25% of these shares should be in the hands of the public.
But there are practical obstacles to close family control. To limit the percentage of shares in public hands to 25% or so will obviously diminish opportunities for fund raising, which might defeat the object of a listing. Moreover, while the Stock Exchange may condone non-voting (or weighted-voting) shares, institutional investors are less accommodating. 'It's not specifically written down,' says John Rogers, secretary of the investment committee at the National Association of Pension Funds (NAPF), 'but it's generally known that we don't favour weighted shares.' The Association of British Insurers takes a firmer line again, according to its head of investment affairs Richard Regan: 'The ABI, on behalf of its members, has promoted the view that restricted voting shares are undesirable'. Of course, even big investors cannot dictate to the market, but a company wanting to list its 'A' ordinary restricted voting stock 'may well find that insurers don't subscribe'.
Institutional disapproval has persuaded many companies to scrap multiple share structures. Until 1992, for example, the two founding families controlled over 51% of the votes at Greenalls Group, the brewers. Enfranchisement of the limited voting shares left the Greenall clan with just under 10%. But company secretary Anthony Spiegelberg points out that, 'It meant we could go to the market for a rights issue' - and play the acquisition game. However smaller businesses in niche markets may be less concerned about rights issues and acquisitions. And if they do apply to list restricted voting shares they will not find themselves alone. There are still more than 30 companies with dual voting structures on the main London market.
A newcomer to the market might alternatively think about some form of 'golden' or 'master' share, capable of outvoting all others. Golden shares became familiar a few years ago, when used by the Government to preserve former state enterprises as they staggered into the private sector. Again, they are not popular with the institutions: 'Any controlling share is undesirable because the threat of veto distorts the ability of shareholders to manage their investments,' says the ABI's Regan. Government golden shares were at least short-lived. However permanent golden shares could be acceptable to the Stock Exchange, and without government involvement. 'A company could make an application to the Exchange, which would look at the circumstances,' says a spokesman.
Desire to avoid takeover would not normally be sufficient. Nevertheless Reuters Founders Share, dating from the company's flotation in 1984, was expressly designed to see off any attempt to gain control. It is one of a number of measures intended to guarantee Reuters independence from external pressures, whether commercial or governmental. As far as the institutions were concerned, says assistant company secretary Ronald Gladman, 'the Founders Share doesn't seem to have been an issue'. Certainly there's no sign of the company's progress having been impeded by institutional disfavour.
The only other quoted company having 'founders' shares', at the present time, seems to be a small manufacturer of clay pigeons, CCI Holdings, which joined the AIM last year. In this case, explains Jonathan Cridland, one of the three founder directors, the purpose of the special shares was to create a ratchet which would enable the founders to convert to a greater number of ordinary shares after five years - if certain targets are achieved. 'So it's for the benefit of ordinary shareholders too.' There is a different principle at work here: performance rather than preservation. And it is one that founding families should be careful not to overlook.