Business Succession Planning - Research Paper Example

INTRODUCTION Historically the position of shareholders was very weak compared to the power position of the board of management. But recently we have seen a shift in the power position from the management board to the shareholders. For example in Netherlands, there has been a considerable shift in the power from the management to the share holders because of various reasons such as a recent influential advice from the Social and Economic Council to the Dutch Government and Parliament, the pressure exercised by institutional investors on the Dutch government and Companies to limit the use of anti-take-over devices, the expanding shareholder base in the Netherlands and increasing number of foreign professional investors in Dutch Companies.(1) These reasons are specific to Netherlands, but this trend to issue more powers to the shareholders can be observed across the world. When there is a shift in the powers from the board to the shareholders it is becoming more important to focus on the position of minority share holders in a company. The minority shareholders are those shareholders who are in a position to exercise control over the issues of the company. This situation may lead to a conflict of interests between the majority and minority share holders. The reasons for such conflicts and the likely effects of those conflicts on the corporate governance and the ways to solve such conflicts are discussed in this paper. REASONS FOR CONFLICT The following can be the reasons for conflict between the majority and minority shareholders as mentioned by John Farrar and Laurance Baulle (2): Structural reasons: The organization structure is so designed that some people may have advantages over others by having access to information and resources so that they have more of insider information. Hence, this creates an organization which is not transparent. Also the majority share holders can have control of financial resources and human resources of the company and this may create a domination over the minority group. The Institutional allocation of authority can be imbalanced and can be according to the benefit of few people. The majority share holders may have more power in decision making and when the minority do not agree for decisions they may threaten to create a deadlock until the minority group agrees.In case of proprietary companies(3), the ownership and management are overlapping and there is no distinction between the two. Hence, the company is managed in such a way that is best for the owners which may cause conflict with the minority shareholders. Absence of Information and Factual Complexity: Withhold of valuable information causes mistrust among the minority group and this can ruin the confidence of the minority group on the management. Hence, when there is information is available freely the shareholders are not willing to believe the credibility and this can cause confusion. Breakdown of relations: Personal relations between directors, shareholders and employees can be a cause of conflict, or can at least exacerbate conflicts caused by other factors such as loss of trust, poor communication, stereotypes of gender or class,high levels of emotion, ego clashes, cultural or gender tensions, autocratic or uncooperative behavior. Shortage of Resources: Resources are finite in nature and when more is enjoyed by some, it is going to be less for the others which may result in conflict. EFFECTS ON CORPORATE GOVERNANCE According to Aleksandr Shkolnikov in his report "Protecting minority shareholders in emerging markets"(4), minority shareholders can have a major influence in the governance and overall success of a company. They can also help in the development and sustainability of capital markets. They play a major role in scrutinizing board actions and can be check on the power of the controlling group. By doing so, they create the transparency and ethical trade practices and good governance which can result in the development of the company and the industry as a whole. The financial crisis in Asia in 1997 was caused mainly by the lack of transparency and concentration of powers with some controlling groups of shareholders. This lack of good governance can weaken the corporations and hence, many companies collapsed during the financial crisis. Another example can be quoted from Middle East. In Middle East many companies are controlled by members of the family. To compete in the international market it becomes very essential that they attract foreign investment. But with the power positions held by family members it become very difficult to get a slice of the foreign direct investment which is very essential for growth. EFFECTIVE CONFLICT MANAGEMENT AND GROWTH 1. Investor agreement: Authors Willian P. Lloyd and John H. Hand in their paper titled, "Advance Planning to Avoid Shareholder Conflicts in the Close Corporations" (5) have discussed a number of ways by which the conflicts can be avoided. The main suggestion made by the authors is that all the investors should sign a restricting agreement restricting the powers of the majority. We can understand that in a large corporation the management is elected by the shareholders. The election of the Board of members is dominated by the majority groups and the votes of the minority group do not have a significant impact on who is elected. The majority shareholders own the board of management also. Allotment of huge salaries brings down the available profits and dividends will be very low. To overcome this problem, it is essential that some contractual restrictions are imposed on the behavior of the majority shareholders. In case of closed company, the minority shareholders can threaten the majority group by offering their share to an undesirable buyer. Hence, to avoid a conflict created by such situations, it is essential to mention some restrictions to sale in the agreement signed by investors. Relationships with outside Interests should be restricted. The majority shareholders can have other businesses and they may influence the decisions made by the Board for the benefit of their other business interests. Hence, an agreement is essential controlling all these activites. For example, Merrill Lynch Commodities, Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc. (NYSE:MER), Pacific LNG Operations Ltd, and InterOil Corporation have executed a shareholder agreement for the development of a liquefied natural gas (LNG) project in Papua New Guinea. Such agreements help in avoiding conflicts when the project is carried out. 2. Associations for shareholders awareness: Associations and bodies have to be created for the protection of the rights of minority shareholders. These bodies can educate about the rights, roles and importance of good corporate governance. For example, The Association for the Protection of Shareholders' Rights (Akcioner), a CIPE partner in Macedonia, has been instrumental in protecting the rights of minority shareholders in that country. Akcioner was created to educate small shareholders on their rights and responsibilities and to facilitate collective action in order to advocate for their interests. Such organizations help the minroty shareholders that they are not alone and they can share their experiences and figure out ways to stop exploitation. 3.Role of courts in conflict resolution: Courts have been playing very limited role in conflict resolution because of their reluctance to intervene in decisions made with the sense of business judgment. But, in the leading case of Ebrahimi v Westbourne Galleries Ltd, the court took an active role and it was major milestone in conflict resolution between majority and minority shareholders. It was a case of a partnership of two Persian carpet dealers in London, which was subsequently incorporated. Later the son of one of the directors was made a director and given shares. The father and son ganged up on the other director, Ebrahimi, who was removed from office. All the profits were distributed as directors' remuneration. Mr Ebrahimi sued on the basis of the statutory minority shareholder remedy, which was then limited to oppression as a member, and [also sought] winding up on the just and equitable ground. This case ruling played a major role in changes in Law not only in UK but also in Canada and Australia. In Canada the Modern Corporation Law suggests 3 methods to resolve conflicts, and among them is that Shareholders now enjoy an expansive right to apply to court for leave to commence a derivative action in the name of the corporation where the directors or officers have failed to do so because of a personal interest in the matter. 4.Solicitation of approval by minority shareholders: According to Jeffrey M. Leavitt(6), there remains one sanitizing action that may legitimate a board's actions in the face of an unfair dealing claim-securing the explicit and affirmative approval of the minority shareholders. Not. For example in the case of Phillipines Racing Club Inc.,(PCRI), there is a major conflict among the majority Malaysian investors and the minoryt shareholders. The minority group were not given any information about the management decision to swap an important race track for shares in a subsidiary of the company. This has created an uproar among the minority shareholders and the minority group has insisted that the company should follow the Philllipines Code of Corporate Governance in the future to resolve conflicts. This includes complete transparency and soliciting responses from the minority shareholders. CONCLUSION During the privatization era of the 199os there was a huge trend among investors to invest in incorporated companies. But lack of good corporate governance created major conflicts and caused mounting losses. This has increased the awareness for the need for transparency and protection of the rights of the minority shareholders. Under a good corporate governance, the minority shareholders can be effectively utilized as watchdogs who prevent the company from becoming inefficient. Hence, good corporate governance can help in changing the perception that minority investors are dead weight on the shoulders of the majority group into a more positive way to help the improvement of the business. The protection of the minority shareholders is becoming more important in the globalised era because of competition at the international level. Hence, if a business is run according to the interests of few shareholders who have majority shareholdings, then it is a sure recipe for failure. REFERENCES 1. Timmerman L. and Doorman A., Dec 2002, "Rights of Minority Shareholders in the Netherlands", vol 6.4, Electronic Journal Of Comparative Law, available at http://www.ejcl.org/64/art64-12.html 2. Farrar . John H and Boulle. Laurence J, 1998, Farrar's Company Law (, 4th ed), Butterworths, London. 3. Naples. David M, 2006, "Business Succession planning, changing the ground rules", Probate and property, March/ April 2006 available at http://www.abanet.org/rppt/publications/magazine/2006/ma/naples.html 4. Scholnikov Alexander, 2006, "Protecting minority rights in emerging markets", Economic reform, Feature Service, Center for International Private Enterprise, Washington. 5. Lloyd .William P and Hand .John H, 1983, "Advance Planning to Avoid Shareholder Conflicts in the Close Corporation", Journal of the Institute of Certified Financial Planners, 73 - 78. 6. Leavitt. Jeffrey M, Spring 2005, "Burned Angels: The Coming Wave of Minority Shareholder", North Carolina Journal Of Law & Technasology,Volume 6, Issue 2: 223 7. Mallin Christine, 2007, Corporate governance , Oxford University Press, Oxford 8. Solomon J., 2007, Corporate governance and accountability , John Wiley, Chichester 9. DeMarzo, Peter M., 1993, "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder", Review of Economic Studies 60, 713-734. 10. Rubin, Amir, 2006, Diversification and Corporate Decisions, Corporate Ownership and Control, 209-212. 11. Carney, William J. 1980. "Fundamental Corporate Changes, Minority Shareholders, and Business Purposes." American Bar Foundation Research Journal, 1980 (Winter): 69-122. 12. Dunlavy, Colleen A. 2004. "From Citizens to Plutocrats: Nineteenth-Century ShareholderVoting Rights and Theories of the Corporation." In Constructing Corporate America:35 13. Anthony. Joseph W and Boraas. karlyn V, Sept 1999, "Minority Shareholder rights revisited", The Hennepin lawyer, Vol 65, No.4. 14. Arnaldo F. Stella, July 2007, Race Relations: Philippine Racing club minority in a David Vs Goliath battle, Business Mirror perspective. Available at http://www.businessmirror.com.ph/08072007/perspective01.html 15. Merrill Lynch Commodities, Pacific Lng And Interoil Sign Shareholder Agreement for Lng Project, July 31, 2007, Reuters, Houston, Available At http://www.reuters.com/article/inPlayBriefing/idUSIN20070731170213IOC20070731 Read More