'Iddlott reduction' offers overhead savings - and risks.
What shall we do with the small shareholder? A business needs its shareholders - vitally - of course, and wider shareownership is both a worthy cause and a good political rallying cry. But for a public company, the really small shareholder is undeniably a pain. They are expensive to service with annual reports, interim statement(s) and circulars, plus an entry in the share register. Small wonder that some companies are taking steps to get them off the register.
Acquisitive businesses, and those with a history of capital restructuring (including scrip issues), are among the most likely to find themselves lumbered with a lot of small shareholders. But this is a tricky area. No board wants to appear negligent of any class of shareholder. On the other hand, it cannot be assumed that the small part-owner has much interest in the company. His shares could have been acquired via an ESOP, or through inheritance or merger or some other accident. 'A lot of people have no idea how they came by their shares,' says Tony Rose of Tavistock Communications, who helps companies put in place 'oddlot reduction' programmes. Moreover, the owners may be 'locked in', Rose points out, either by inertia or because they realise that dealing costs would defeat the point of selling a small packet of shares. They might be very glad if someone offered to buy the holding at little or no cost to them.
This was evidently the feeling of some shareholders after Cairn Energy, a minor exploration and production oil company based in Edinburgh, acquired Toredo Petroleum, also a public company and E&P operator, just over two years ago. Before the takeover Cairn had around 500 shareholders, comparatively few of whom were genuinely small. Toredo added another 2,500 names, many of them with no more than 100 shares each. Worse, as company secretary Hew Dundas explains, the offer consisted of one new Cairn share for every 11 Toredo, so the acquirer ended up with a high proportion of tiny shareholders. 'We became concerned at the cost of maintaining the share register,' says Dundas.
At this point, Rose's team came up with a scheme which would allow the smallest holders to sell at zero cost - if they wished. The company had qualms on various grounds, such as the legality of making an offer to some shareholders but not all, and a desire not to upset any of them. But an offer was made to dispose of all holdings up to a certain size, affecting about 2,300 shareholders or 75% of the register. It was announced that acceptances would be aggregated and placed with a third party at the middle market price on a particular day.
There was very little opposition to the proposal, reports Dundas, and no one complained about being left out. In the event about 1,500 people declined (or ignored) the offer. Nevertheless Cairn was able to trim its share register by about a quarter, with a useful saving in overheads. 'I felt we did very well, although in retrospect we might have done better,' thinks Dundas. What principally prevented a higher take-up was the fact that the share price put on 84% between the acquisition of Toredo and the date of the oddlot deal.
A couple of years earlier Hanson had been through a similar exercise, which produced a rather similar result for a similar reason. 'It was not as successful as it might have been,' admits deputy company secretary Roger Tyson. But it gave numbers of small shareholders a painless way out, and Hanson might one day return to the idea. In the wake of the RHM acquisition Tomkins invited all holders of up to 1,000 shares to sell out, free of commission, to fellow shareholders. A few hundred took the opportunity to sell, according to corporate affairs director Anthony Spiro, but a majority wanted to buy. However, the initiative also provoked numbers of angry letters, berating the company for attempting to influence shareholders' behaviour.
This reaction emphasises the care that's always required in shareholder relations. Hence the extreme caution of some of the most predatory companies when it comes to shareholder reduction programmes. At Williams Holdings, says assistant secretary Malcolm Stratton, 'We like the small shareholder'. Williams offers shareholders a low-cost dealing facility as an 'on-going service'. So does BTR.
For many companies, clearly, the benefits of getting the very small shareholder off the register are easily outweighed by the risks of upsetting management's traditional supporters.