A comparative analysis of shareholders rights in differnt jurisdictions - Essay Example

?A comparative analysis of shareholders rights in different jurisdictions Table of Contents 1Chapter 3 1Introduction 3 1.1Background of Research 4 1.1.2Aims & Objectives 5 2Chapter 2 5 2.1Literature Review 5 2.1.1Shareholders Rights in UK 7 2.1.2Shareholders Rights in USA 9 2.1.3Shareholders Rights in China 10 3Chapter 3 12 3.1Research Methodology 12 3.1.1Research Framework 13 3.1.2Data Collection 14 4Chapter 4 14 4.1Findings 14 5Chapter 5 16 5.1Comparison of Shareholders Rights 16 6Chapter 6 18 6.1Conclusion & Recommendation 18 References 20 Bibliography 24 1 Chapter 1 1.1 Introduction This paper makes a comparative study of the shareholder rights in three different countries: UK, USA and China. The recent financial crisis and convergence of accounting standards through IFRS have attracted the attention of world leaders towards the importance of corporate governance practices in various countries. Whether the shareholders possess enough rights and exercise these rights to safeguard their interests has been much debated because despite the presence of the board, corporations have failed. The analysis of shareholder rights has been facilitated by comparison of three companies from each of the three countries. The chosen companies are Balfour Beatty Plc, KBR Inc and CNOOC Limited. The comparison is based on each of the three companies’ disclosures regarding the shareholder rights in their annual reports and websites. 1.1.1 Background of Research Managers are responsible for the administration of day-to-day operations of the corporation. The shareholders exercise their rights and control in large corporation through board of directors. The directors of the organization are entrusted with the responsibility of sound corporate governance practices through direction, oversight and representation of shareholders. Generally, shareholders of a corporation do not engage in the management of corporation but appoint managers to carry out the business operations. However, this may not be the case when the managers own shares of the corporations in the form of share options. Exercised worldwide, this is one way to align the managers’ interests with that of the shareholders. Corporations mainly issue two types of shares, preference shares and common shares. The preference shareholders get the priority for dividends and when the corporation is liquidated, they get preference to claim over the common shareholders. However, preference shareholders do not have voting rights. Common shareholders, on the other hand, reserve the rights to vote on appointment of board members, decisions concerning dissolving of the corporation, and other fundamental changes in corporation such as changes in capital structure from increase in number of outstanding shares. In general, voting involves issuing a proxy card to each registered shareholders. A proxy is a person who is authorised to carry out the instructions from the shareholder. In the annual shareholders’ meeting, he/she will cast the vote on behalf of the shareholders, in case the shareholder is not able to directly vote (Davis 2003, p.34). The rights of shareholders increase with the increasing ownership. For example, in many countries, a shareholder owning a specified percentage like 5% has the right to place an issue on the agenda in the shareholders’ meeting or a majority shareholder can force a formal audit of the financial statements. In practice, the rights and entitlements with the ownership of the shares are seldom fully utilized by the shareholders. 1.1.2 Aims & Objectives In order to reach any conclusion and provide recommendations related to the shareholder rights, it is necessary to formulate the objectives of the study, which are as follows: 1. To compare and contrast the provisions of shareholders rights in corporate governance frameworks in UK, USA and China. 2. To analyze the extent to which the shareholders in the three countries exercise their rights by comparing three companies, each from the three countries. 2 Chapter 2 2.1 Literature Review Shareholders are the person who own at least one share of a company. When they are the shareholders of the company then they must have a say in the operations of the company. As they are holding the stake of the company then they are expecting return of their invested money. Based on the company’s performance the shareholders would take the decision whether they would invest further in the company or not, or whether they will invest more (Monks and Minow 2011, p.117). The shareholders have the right to vote for select the directors in the annual general meeting of the company. As they have invested money in the company generally they would like to see that their money is in the safe hand. They have also the right to check certain documents of the company as they have interest in the company. Through the inspection of the documents they would like to see that the company are abiding by the law and their interest in the company is safe (Mead and Sagar 2006, p.228). When the company management want to take any decision about policy change, or new association with a company or to separate the divisions of the company then they have to take the opinion of the shareholders as they are an important part of the organization (Sneffen and the Company Corporation 2001). Getting the nod of the shareholders would increase the probability of their further association with the company. When a company is going to issue new shares of the company then they have to approach the existing shareholders as per the rule existing. The shareholders would get the new shares in the pro-rata basis. If they are not interested in the new shares of the company then the company may approach the third party shareholders. But it is the shareholders right that they would be approached by the company management at first when the company take the decision that the share would be issued. The employees and the persons of the management can be also the shareholders of that company if they own at least a share of the company. But it is not their right to perform illegal activity like trading in the stock market on the basis of the information available to them from inside of the company (Emanuel and Emanuel 2009, p. 253). Preferred shareholders are the kind of shareholders that they would receive the dividend at first when the company would generate profit in a financial year. It is not necessary that the company management issue a dividend to the ordinary shareholders but they have to pay dividend to the preferred shareholders (Fried, Shapiro and DeSchriver 2008, p.155). The shareholders rights may be different in different jurisdiction. In the following parts the researcher would go through the rules existing about the shareholder right in different countries. 2.1.1 Shareholders Rights in UK The shareholders of the company should be valued by a company management to protect their own interest. If the shareholders break down their relationships with the company then the company is the party which is going to suffer more. For protecting the shareholders’ rights the Institute of Chartered Secretaries and Administrators (ICSA) has implemented the guidelines that should be followed by the company management in the EU companies. As per the direction the rules have been implemented from 3rd August, 2009 in the EU companies. The new rules for the companies include voting with show of hands for the appointment of the corporate representative of the company. Sometimes the shareholders can’t be present in the Annual General Meeting. Then they can appoint proxies as their representative. The proxies can vote for or against the resolution as instructed by the shareholders through show of hands. The shareholders have the power to call the general meetings and the directors required to present in that meeting. They can also vote in advance for or against a resolution. A company can hold the share of any other company. Then the company representative can vote in the poll as an individual. At the time of the general meeting the directors are liable to answer any question regarding to the company’s operations, raised by the shareholders. For assuring transparency the company management has to publish the result of the poll in their website. If a meeting is adjourned then the company management is liable to organize the meeting after giving at least 10 days notice to the participants of the meeting (The National Archives 2009, pp. 2-12). The shareholders should be notified by the company management about the meeting through the websites and personally. The chairman of a company can’t have the casting vote as per the guidelines of ICSA (ICSA International 2009, p.11). The shareholders can request the company management to discuss about a resolution. If the request is received by the company before the end of the financial year then the company would bear the expense of circulation of the agenda but if that is received after the end of the financial year, then the expense would be borne by the shareholder (Department for Business Innovation and Skills 2011). The rights of the share certificated depend on the article of the company if any percentage of shareholding holds by the holders. The shareholders who hold 25% stake of the company they can block any special resolution passed (Brabners Chaffe Street LLP 2011). Balfour Beatty Plc is a world class infrastructure company which serves all major branches of engineering constructing and consulting. The constituent of FTSE 250 is based in London and listed in London Stock Exchange. The company operates in more than 80 countries (Balfour Beatty-a 2011). The accounting system followed by the company management is IFRS and IFRIC (Balfour Beatty-b 2011, p.88). The percentage of retail shareholders of the company is nearly 75% and other institutes hold the remaining 25% of the shares. For maintaining a good relationship with the shareholders the company has to maintain the guidelines specified by the governing body. In the annual report they used to mention the information clearly with an objective of maintaining a long term relationship with their shareholders. 2.1.2 Shareholders Rights in USA Like United Kingdom a strong shareholder rights guideline also exists in U.S.A. also. In United States the laws governing corporations are different from one state to another. Majority of the states adopted the significant portion of the model act which was prepared in 1984, revised in 2002 and 2005, which stated about the shareholder rights. The rights of the common stock depend on the article of association. In U.S. the corporations can issue stocks of multiple classes such as the common stocks where the shareholders can’t vote or the stocks where the shareholders would get the special dividends. Like U.K. the shareholders’ opinion is valued when the company management wants to change some policies, merger, dissolution or any change in article of incorporation. When the officers of the company breach any duty that is owed to the organization, then the shareholders may sue him on behalf of the organization for protecting their interest and the interest of the organization. From the past 10 years new securities laws exist in U.S.A. for protecting the interest of the investors. The shareholders of an organization can redeem the stock hold by them if they want so, as it has been specified in the article of association of the company. There is also the rule that the preferred stockholders can convert their stock to the common stock if they want so (US Legal Inc-a 2010). The shareholders of an American company have the say on the remuneration of the executives of the company as per the ‘Shareholder Bill of Rights’ by the U.S. Senators. The shareholders have to own at least 1% share for at least two years then the can vote for the nomination of the executives of the company. The public companies board need to prepare a risk committee for managing the risks efficiently. The board members also have to face the re-election annually and that certainly increase the power of the shareholder (United States Senator for New York 2009). In U.S. the right of the shareholders is very limited to call a meeting when in U.K. 10% of the shareholders can call a meeting (Monks and Minow 2011, p.118). KBR is an American company which offers services in construction and engineering industry. The company is listed in New York Stock Exchange and the head office is in Texas. The company mainly offers the services in USA, Asia Pacific, Africa and Iraq. US GAAP is the accounting standard they follow. The retail shareholders hold 74% of the stakes of the company when BlackRock Inc is the next largest shareholders with 9%. As the company has the retail shareholders so the company has to take care of the shareholders’ rights properly. The reports published by the company include the separate message of the president of different segments. The company website publishes the information about the company’s recent announcements, the corporate governance report, the SEC filings, financial reports and financial reports. The Texas based companies has to abide by the guidelines provided by the Texas Business Corporations Act and the decisions taken by the Texas Supreme Court, so KBR Inc also has to maintain the law (KBR Inc-a 2011, pp. 85-86). 2.1.3 Shareholders Rights in China In China the law for protecting the shareholders rights was first implemented in the year 1993, which was the corporation law. In the year 2005 the law has been completely changed for protecting the interest of the stakeholders of the company. The shareholders of the company have the rights to choose the managers, take participation in any important decisions of the company. When the company take the strategy of invest in any other company then that should be approved by the company shareholders. The shareholder who is dominated by the actual controller of the company then that shareholder can’t participate in the voting matters. When a resolution come out from the shareholders’ meeting violate any law or that is against the rules of the article of association then a shareholder may request the peoples’ court within 60 days of the resolution has taken place to revoke it. The shareholders should have the right to determine the investment plans of the company and the operational guidelines, approve or debate over the reports of the board of directors, financial budget plans, profit distribution plans etc. The shareholders have a say over the change of capital of the company, also they can vote about the bonds the company is going to issue as well as they can participate in the issue of revising the articles of association of the company (Shangshang 2009, p.2). The shareholder who holds largest percentage of stake of the company, only that person has the right to convene the meeting. The temporary meeting can be called by the shareholders who collectively have 10% voting rights or the directors who collectively have 33% voting rights. The shareholders should be notified 15 days before the day when the meeting is going to organize. The important decision of a company like merger, dissolution, changing in registered capital should be adopted by at least 75% of the shareholders of the company. When a shareholder wishes to transfer the stocks to any non-shareholders then that move should be approved by more than half of existing shareholders (Ministry of Commerce, P.R. China 2005). CNOOC Limited, the china state owned corporation and the third largest oil company is head quartered in Beijing. The company is listed in Hong Kong stock exchange and New York stock exchange. The main regions of operation of the company include China, Australia, Nigeria, USA, Singapore etc. The company follows the IFRS accounting standards and Hong Kong financial reporting standards. The revenue of the company mainly comes from China itself. The annual report of the company includes the strategies undertaken by the company, the internal control and risk management framework of the company. The corporate governance structure of the company is also mentioned in the reports of the company. The report of the directors, top executives is also published in the annual report of the company which assure the transparency of the company towards the general people of the country. The maximum percentage of stake of the company is owned by the government, but as per the existing rule the company management take decisions after a transparent voting system for protecting the interest of the shareholders (CNOCC Limited-a 2011, pp. 32-33). 3 Chapter 3 3.1 Research Methodology Research is a systematic approach towards generalization and formulation of theory by articulating the problem, collecting data or facts, analysing the data and arriving at certain conclusions. The conclusions derived, either take the form of solutions or a general concept. Research has significance in providing solution to various planning and operational problems of business. There are mainly four types of research. Explanatory research involves analyzing the data and exploring the possible relationships between different variables without the knowledge of their end applications. Exploratory research includes experience survey, literature survey and study of problems to gain insights. Conclusive research involves testing of hypothesis formulated from exploratory research and drawing specific conclusion for implementation. The conclusive research can be classified into descriptive and experimental research. Modelling research involves real-life problems to be formulated as models such as simulation model, mathematical model (Panneerselvam 2004, pp.6-10). The most important part of any research is the research design, which involves selection of the research approach and data collection. The research design guides the data collection. Based on the requirements of study, the two major classification of research approach are Conclusive research and exploratory research. Basically, the research method should be based on the aims and objectives of the study. The data is the basic input to the research process. The data is generally of two types, primary and secondary. Various methods are used to collect primary data such as observation method, mail surveys, and personal interviews. The secondary data is collected from those sources that have already been established for the purpose of further analysis. Sources of secondary data include government publications, journals, books, magazines, publications of trade associations, annual reports, and research reports from universities etc. 3.1.1 Research Framework In the literature review section of the paper, a detailed theoretical background has been provided to understand the shareholders rights in the three countries. Besides, as this paper mainly deals with the shareholders’ rights, a detailed study on the importance of shareholders and the protection of their rights in corporate governance framework have been presented. As one of the objectives of this paper is to compare and contrast the shareholders’ rights in corporate governance framework in three different countries UK, USA and China, it is necessary to study the provisions of the rights of shareholders in these countries. In order to do so, three companies each from these countries have been analyzed using their recent annual reports and data published on their respective websites. Therefore, this research is qualitative research using the secondary data. 3.1.2 Data Collection The relevance and authenticity of the research depends upon the authenticity of the data collected. As this research involves using the secondary data, the corporate governance framework and rights of the shareholders have been presented using the various government websites of UK, USA and China. The data from various published books such as latest publication by OECD have also been taken. The companies’ data is collected from their websites and annual reports. All these data sources are authenticated and have been helpful in obtaining material research results. 4 Chapter 4 4.1 Findings UK-based Balfour Beatty’s board place great importance to the relationships with the shareholders and therefore, make efforts in keeping the shareholders informed of the significant developments in the company on a regular basis. In 2010, around 200 meetings with the institutional shareholders were held which was a substantial increase from 140 meetings held in 2009 (Balfour Beatty Plc 2011, p.86). The company also has a different department for maintain the relationship with the investors and protecting the shareholders’ interest. Shareholders are informed up to date by the company management. The political donations to be made by the company were approved by its shareholders in 2010 AGM with the specified limit on the donations. The approval was a precautionary measure keeping in view provisions under Companies Act (Balfour Beatty Plc 2011, p.87). Moreover, the shareholders approval is required for employees share option schemes and share incentive plans. The executives’ compensations are aligned with their performances based on Total Shareholder Return (TSR) as per the provisions in the Corporate Governance Code 2010. One of the main interests of the shareholders of a company is to get the return from their investment. The shareholders of the U.S. based company KBR Inc have enjoyed a good return from their investment. The company has achieved double digit growth in the financial year 2010, their earnings per share also increased along with the operating income and net income. That means the managers of the company were efficient throughout the period as they were successful to cut cost and gain more profit. The stock price of the company has rose 60% from the previous year that means they were successful to create the shareholder’s wealth and it also indicates that their main objective is shareholder’s wealth maximization. The company maintains the pre-emptive rights of the shareholders. When they issue any additional securities in the market for getting fund for any future acquisition then it is the right of the existing shareholders to get the offer at first and if they not take the offer then the shares are offered by the company to the third party shareholders. The number of shareholders of the company was 139, as per the record of February 11, 2011. As per the company policy there is a policy named revolving credit policy. This policy allows the company to pay dividends to the shareholders or engaging in the equity repurchases but that should not be exceeded $400 million. The company management has properly maintained the guidelines as the annual general meeting of the company held on time as well as some temporary meeting of shareholders also held for the review and needed change in the policies of the company (KBR Inc-b 2011, pp. 5-47). Like the other two companies from U.S.A. and U.K., CNOOC limited also has the main objective of shareholders’ value creation. In the financial year 2010, the company has changed some of the management personnel after getting the approval of the shareholders of the company. The stock price of the company rose 51.1% from the last financial year which has increased the shareholder value over the year. The company is engaged in the practices of corporate social responsibility which also increase the value of the shareholders. The shareholders have the right to know that how the company is maintaining the business ethics, whether the operation of the business is transparent or not. The company has to practice the corporate governance code as it is listed in the Hong Kong stock exchange, which ensures that the decisions made by the company management is transparent and those are protecting the interest of all the shareholders. The board of directors is selected by the needed approval of the shareholders. The board is committed to enhance the shareholder value and protect their interest for a long term by maintaining the high standard of ethics and integrity. After measuring the performance the nomination committee would propose the shareholders for re-election of the directors and executives of the company. In the extraordinary general meeting and the annual general meeting the directors and the non executive directors are liable to answer the questions raised by the shareholders of the organization. There is a professional investor relation department which is an important medium of communication between the shareholders and the company (CNOCC Limited-b 2011, pp. 32-33). 5 Chapter 5 5.1 Comparison of Shareholders Rights The shareholders rights in a company ensure the transparency of the company’s operations. From the data collected by the researcher about the shareholders rights in three countries and the practices of the matter in the three companies it can be said the practices are little different in those three companies. All the three companies are operating in more than one country. In the era of globalization all the companies need to be transparent in the business activities and properly disclose the practices done by them. In all three countries and the respective companies shareholder can enjoy the power to opine in the decisions taken by the board and the management of the company. They also have the power to elect the directors through voting. They have also the power to check certain documents so that they can understand the company is practicing no fraud, the operations perform by the company is transparent. But comparing between the laws that exist in the three countries it can be said that the shareholders’ rights in China are the strongest. In China the important management decisions like merger, acquisition and dissolution of the company should have approval of at least 75% of the shareholders but in U.S. and U.K. these decisions only need the approval of more than 50% of the shareholders. In U.K. and China the temporary meetings can be called by 10% of the stakeholders but in U.S. the shareholders right is limited in this area. In China there is a special law that any shareholder can request the people court if he found that any resolution that has been passed in the general meeting is violating any law. He can appeal to the court within 60 days the resolution has been passed. In United Kingdom the shareholders who have stake of 25% have the power to block any special resolution that has been passed in the general meeting. This certainly enhanced the power of the shareholders in that country. In United States there are different states, and the rule about shareholder rights can be different, though there is a common law which is followed by most of the states. KBR Inc is a company based in Texas and in Texas the common law followed by the Texas based companies (US Legal Inc-b 2010). The companies which are based in U.S. issue multiple types of stocks like common stocks where the shareholders can’t vote and the preference shares where the shareholders get special dividends. This policy certainly is a concern about the shareholders’ rights in that country. The companies also get hampered as the common stock holders don’t have the right to vote, they would think twice before continuing the association with the company. But the shareholders get preference in the U.S. based countries as they have the right to redeem their stocks any time if they wish to do so. They can do this as per the article of association of the company. In China the shareholders who are dominated by the actual controller can’t participate in the voting matters. This framework enhances the rights of the shareholders in China, which doesn’t exist in the countries like United States and United Kingdom. The shareholders’ rights are strong more in China, as they have the power to participate in the decision about bond issuance also, when in the other two countries this framework doesn’t exist. In contrast in U.S.A. the shareholders only have the voting power when they own at least 1% of the company’s share for minimum two years. This rule enhances the power of the company when they want to take a decision about the company, as the percentage of shareholders with voting rights are lower than the companies in other countries. In United Kingdom the shareholders have the power to vote on the issues about share option schemes and share incentive plans. Although the basic guidelines for maintaining the shareholders rights are same in the three countries, some principles are different from one country to another. From the comparison of the power of the shareholders it can be derived that the shareholders’ right laws are relatively strict in China. 6 Chapter 6 6.1 Conclusion & Recommendation For operating a business in a continuous basis a company should value the shareholders. The management and the board of directors should consider the shareholders’ opinion when they are taking any decision about the important matters related to the company. Depending on the company performance and understanding their importance in the company management the shareholders take decision about their further association with the company. From the report it has been derived by the researcher that in all the three countries there are strict guidelines for maintaining the rights of the shareholders. The basic guidelines are more or less same in all the three countries but in some areas it is variable. It has been found by the researcher that the law about the shareholders rights are stricter in China than other two countries. In U.S.A. the power of the company management is more. Some guidelines are justified from the researcher’s point of view. The shareholders can take part in the voting system if they held the stock of 1% of the company for minimum 2 years. This rule increase the probability that the shareholders would vote for the well being of the company overall. The rules about shareholder rights are produced by respective governments to protect the interest of the shareholders of the company. These laws assure that the company management is not practising any fraudulent, as they have to produce their documents in front of the shareholders. The important decisions taken by the management should be approved by the shareholders as that ensures further association with the company. The companies should undertake the best part of the shareholder rights laws of other companies. Like the companies in U.S. or U.K. should mandate that the important decisions taken by the companies like merger, dissolution should get the approval of at least 75% of shareholders. This assures more power of the shareholders, as well as it can be said the step made by the company is the right one in that situation. It has been found through the research that some companies arrange the meetings of the shareholders in an inconvenient place and inconvenient time. This should not be happened as this can harm the reputation of the company. The probable place and the time of the next meeting should be notified by the company management in the previous meeting. Any change in the plan or any urgent meeting should be notified by the company management at least 10-15 days before to the shareholders of the company. A transparent operation by the company management and valuing the shareholders’ opinion assure growth for the company and as well as help to achieve their long term goal. References Balfour Beatty Plc. (2011). Annual Report and Accounts 2010. [Pdf]. Available at: http://annualreport10.balfourbeatty.com/downloads/PDFs/BB_AR_2010.pdf. [Accessed 10 February 2012]. Balfour Beatty-a. (2011). About Us. [Online]. Available at: http://www.balfourbeatty.com/. [Accessed on: February 10, 2012]. 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