The Fourth Asian Roundtable on Corporate Governance Shareholder rights and the Equitable Treatment o

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The Fourth Asian Roundtable on Corporate
GovernanceShareholder rights and the Equitable
Treatment of ShareholdersKenichi
OsugiProfessor of Commercial Law at Tokyo
Metropolitan University

• Protecting Minority Shareholders during Shifts in
  Corporate Control
• Mumbai, India
• 11-12 November 2002

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I. The Theme
Two main topics 1) A birth of outside
shareholders 2) Formation of controlling power
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1) A birth of outside shareholders

• individual investorsInfluential
  families individual investors distribution ind
  ividual investors individual
  investors individual investors individua
  l investors (hundreds or thousands of ..)

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2) Formation of controlling power

• individual investors
• individual investors apply for Business
  enterprise
• individual investors tender offer (or
  investing fund)
• individual investors
• individual investors
• (hundreds or thousands of ..)

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Two items
1. Asia is not unique in large ownership 2. OECD
Principles of Corporate Governance, No
single model of good corporate governance
Emphasis on efficient and transparent markets
for corporate control
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II. Controlled Companies in the process of Going
Public - A Birth of Outside Shareholders
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A birth of outside shareholders

• individual investorsInfluential
  families individual investors distribution ind
  ividual investors individual
  investors individual investors individua
  l investors (hundreds or thousands of ..)

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A large shareholder may abuse this controlling
position after the outside shareholders
participate in the company. Going public could
have several advantages.
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Access to market finance Small investors
can take part in fast- growing enterprises.
If suitable professional salaried managers
successfully replace the owner-managers while
the latter keep monitoring function over the
former, going public motivates professional
managers and relieves of the controlling
family of the burden
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Legal issues during listing processLegal issues
after listing process inter-related ! In the
countries where post-listing protection is bad,
law should limit the scope of listing of
controlled companies,e.g., law should prohibit
a large owner selling less than two-thirds of
her shares
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However, better to haveGreater freedom when
going public and tightening post-listing
regulations, rather than narrower listing
policy and looser post-listing regulations1)
Mandatory disclosure2) Penal and civil sanctions
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3) equality policy shareholders rights
enjoyed by controlling shareholders and those
enjoyed by the investing public shall be the
same. Flexibility necessary, since, some
publishing companies legitimately want managers
listing standards of stock exchanges1) multiple
classes of shares, distribute non-voting
shares2) arrangement of disproportionately large
control
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III. Buyouts - Formation of Controlling Powera
new trend hands on
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Formation of controlling power

• individual investors
• individual investors apply for Business
  enterprise
• individual investors tender offer (or
  investing fund)
• individual investors
• individual investors
• (hundreds or thousands of ..)

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Suppose shares are traded at USD 100.A tender
offer of 120. Shareholders believe the fair
value should be more than 150. However, they
feel oppressed, since their share value will
decrease after the consummation of the offer.
To sell, or not to sell. decision is often
distorted.Law shall intervene in buyouts to
prevent.
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Section 14 (e) of the 1934 US ActThe reason to
have substantive regulationsSection 14 (d)(7)
provides that the an acquirer shall not exclude
any shareholders, and shall, if he raises the
share price at a later date, give this higher
price even to the shareholders who responded to
the offer before the revision was made (best
price rule).
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Nevertheless, US regulation is not perfect. A
partial tender offer, leftover minority
shareholders fear the companies going private
Court judges review the transaction which
forecloses leftover shareholders, Prohibit
the acquirer from buying minority shares at
lower prices for 3 or 5 years .More sensible
solution an appraisal right on minority
shareholders when a birth or change of a
controlling shareholder.
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Similarly essential is disclosure of a large
block.Section 13 (d) requires a blockholder
with 5 or more share holding to disclose her
ownership and its increase or decrease. Because
buying or selling by blockholders affects the
market price of the company.
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IV. Concluding Remark Long-term value for the
entire shareholders is the closest index of
development of a national economy. Especially
when evolution and dynamics is more important
than stability in corporate management, creative
destruction rather than a stable order.
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Function is more important than form. eg.
Japans venture bubbles. Creating a stock
market and letting large companies enlist will
not necessarily increase national wealth.
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Western companies (especially investment funds)
buying out Asian companies. Collision of
cultures The Asian side needs to show patience
and have an open mind, The Western side should
fulfil their moral obligation to explain and care
for fair distribution of the fruits of economic
success.
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Shifts in Corporate Control Crossroads where
Eastern and Western capitalism meet each other,
filled with unknown possibilities and risks.
THE END