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Not all shareholders are created equal

Nov 14 2019 11:30
Simon Brown

One of the core tenets of being a shareholder is that at a company’s annual general meeting (AGM), every shareholder is equal. You get one vote for every share you hold.

So yes, the larger shareholders get more votes, but that’s because they have a larger economic interest and their voting is directly linked to this interest via the number of shares they hold.

However, this is not always the case. Via one of two different structures, some shareholders will be more equal than others.

The first is via the holding company structure that Pick n Pay used to have. In this example, Pick n Pay was held by the listed Pick n Pay Group. But then another separate entity, Pick n Pay Holdings, owned just over 50% of Pick n Pay Group. 

That meant that Pick n Pay Group was effectively controlled by the holding company, of which the founding Ackerman family held just over 50% of the shares.

So, the Ackerman family had effective control of Pick n Pay, but only held just over a quarter of Pick n Pay (through its holding of half of the holding company that held half of the group).

This holding company structure, which is often called a pyramid structure, was undone in 2016 and a new controlling structure was put in place.

This new structure is an example of the second way of keeping control without actual control. Here the Ackerman family was given special B-shares that have no economic interest, but do have voting power. 

This second method is the more common method of voting control without economic control. In the US, both Facebook and Alphabet Inc., parent of Google, use this structure to ensure the founders continue to have control even while they hold less than 50% of the shares after listing.

Locally, Naspers* also has high-voting A-shares that are not traded on the JSE, but afford the holders thereof control. In some cases, such as with Alphabet, both classes of shares trade, but the higher-voting shares have more votes; say, for example, 1 000 votes per normal share. Founders will therefore hold those shares to retain control over the company.

Most often these control structures don’t cause any real issues. But the recent Shoprite** AGM saw it come to a head when ordinary shareholders effectively voted Christo Wiese off the board.

When the voting was done, 61.2% of shareholders had voted against Wiese returning to the board. That effectively meant that he no longer had a board seat.

Yet Shoprite also has shares with little economic value, but high voting rights that are held by Wiese. You’ll remember he tried to get the board to buy them back from him late last year for over R3bn, but fortunately the idea was scrapped.

So, when ordinary shareholders voted him off the board, Wiese used his non-economic shares to vote in his favour and thus managed to remain on the board. 

Then, a day later, the Shoprite lead independent director, Professor Shirley Zinn, resigned from the board with immediate effect. Of course, I have absolutely zero insight as to why she would suddenly quit the board. The Sens announcement on her resignation also made no mention of her reasons. But I think one could propose a very possible chain of events.

Could it be that, when Wiese used his shares to effectively override the wants of ordinary shareholders, Zinn considered this untenable and quit? With her being lead independent director, to my mind, this would make sense. 

That said, Wiese is a significant shareholder in Shoprite, and he’d claim he was protecting his rights. Fair enough.

But at the end of the day, I would like to see a world where it really is just one share, one vote, with no special shares that can be used to the disadvantage of ordinary shareholders.

*finweek is a publication of Media24, a subsidiary of Naspers.

**The writer owns shares in Shoprite.

This article originally appeared in the 21 November edition of finweek magazine. Buy and download the magazine here or subscribe to our newsletter here

investment  |  company  |  business  |  shareholders  |  schalk louw
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