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Control of a company is simple when a single shareholder, entity or collection of holders acting jointly holds 50% plus one share. It then has control as it has a simple majority and can vote accordingly at the annual general meeting (AGM), blocking the minority shareholders.
But things get more complicated when no entity, person or group holds more than 50% of the votes. The JSE considers 35% to be effective control if nobody is holding a larger percentage. Now, in truth, this block of 35% can be voted down by the other shareholders who hold 65%. Also, when a shareholder or a group acts jointly cross the 35% threshold for the first time, it has to make an offer to the other shareholders if it wants to buy them out. This can be waived if the other shareholders agree.
But things get interesting when a party holds around 45% of the shares in issue, and this is currently the case with construction group Murray & Roberts and German investment firm Aton. Aton owns around 43.9% of Murray & Roberts’ shares as I write this. Aton has made an offer for the remaining shares at 1?700c/share, but for the purposes of this article, let’s assume its shareholding remains at 43.9%.
At this level the company has what is often referred to as negative control. It doesn’t hold a majority of shares, but needs only a small number of shareholders to vote with it on any issue to get to the 50% plus one. Further, some more significant votes at the AGM require a 75% majority, in which case Aton has complete negative control, as it can block these votes. So, while Aton may not be able to get its way, it can stop others from getting theirs.
It is also important to understand that at an AGM, the voting pool is only those who are either at the AGM or voting via proxy. So, if a shareholder does not attend or vote by proxy, the total number of votes is reduced. An example here is a company with 100 shares. One shareholder has 44 shares, while a holder with seven shares decides not to attend. The voting pool is then 93 shares, and hence a majority is only 47 shares, making it even easier for the 44 shareholders to block any votes.
Taking it yet a step further – depending on the board composition and staying with the Murray & Roberts example above, Aton could expect to get half of the board seats, which could render a board useless, as any major decision requiring board approval could be deadlocked. So, if, for example, Murray & Roberts decides it wants to do a rights issue, Aton could block it by deadlock.
Now minority control itself is not a problem, but it certainly is a problem if there is hostility between the shareholder with negative control, and the other shareholders, or the board. The negative-control shareholder can render the company unable to make major decisions. This would certainly not be in the negative-control shareholder’s interests, but it may take the view that in time other shareholders will capitulate – but it’s messy; it’s better for all that some compromise is reached and, frankly, the negative-control shareholder holds all the cards.
As a last point: some listed companies have shares with different voting rights. So, while a shareholder may only have 20% of issued shares, it may be high-voting shares; as such, it has control via them. To me this is fundamentally wrong, but it is within the JSE rules. Shareholders must then decide if they’re happy holding the lower-voting shares, or would rather invest elsewhere.
This article originally appeared in the 21 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
