Shares

Shares are financial instruments. A share is a certificate evidencing the rights of the shareholder, to whom it is granted, in a company. Shares may take bearer or registered form. One share of stock represents a fraction of the share capital of a corporation.

Shares to be issued – Shares for which consideration has been received but which are not issued yet.

Ordinary sharesAn ordinary share is an equity instrument that is subordinate to all other classes of equity instruments.


Potential ordinary shares – A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares. Examples of potential ordinary shares include:

  • financial liabilities or equity instruments, including preference shares, that are convertible into ordinary shares; or
  • options and warrants; or
  • shares that would be issued upon the satisfaction of conditions resulting from contractual arrangements, such as the purchase of a business or other assets

Owners Owners are holders of instruments classified as equity.


Characteristics

  • Yield: dividend payments and increases in value of the financial instrument are possible;
  • Shareholder’s rights: financial and ownership rights; those rights are determined by the law and the articles of incorporation of the issuing company;
  • Transferability: unless otherwise provided by law, the transfer of bearer shares does not, as a matter of principle, require any formalities, as opposed to the transfer of registered shares which is often subject to limitations.

Avantages

In principle, the investor has voting rights and shares the profits of the company. He may equally obtain higher returns than for investments in term deposits or bonds.

Risks

1. Entrepreneurial risk

A share purchaser is not a creditor of the company, but makes a capital contribution and, as such, becomes a co-owner of the corporation. Consequently, he is participating in the development of the company as well as in the related opportunities and risks, which may entail unexpected fluctuations in the value of such investment. An extreme situation would consist in the bankruptcy of the issuing company, which would have as a consequence the complete loss of the invested amount.

2. Price fluctuation risk

Share prices may undergo unforeseeable price fluctuations causing risks of losses. Increases and decreases in prices in the short, medium and long-term alternate without it being possible to determine the duration of those cycles.

As a matter of principle, the general market risk must be distinguished from the specific risk attached to the company itself. Both risks influence the evolution of share prices.

3. Dividend risk

The dividend of a share mainly depends on the profit realised by the issuing company. Therefore, in case of low profits or even losses, it may happen that dividend payments are reduced or that no payments are made.

Importance of shares

Most corporate takeovers are friendly in nature, meaning that the majority of key stakeholders support the acquisition. However, corporate takeovers can sometimes become hostile. A hostile takeover occurs when one business acquires control over a public company against the consent of existing management or its board of directors. Typically, the buying company purchases a controlling percentage of the voting shares of the target company and — along with the controlling shares — the power to dictate new corporate policy.

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The main reason for the hostile execution of acquisition, at least in theory, is to remove ineffective management or board and increase future profits.

Strategies to Avert a Hostile Takeover

With this in mind, some basic defense strategies can be used by the management of potential target companies to deter unwanted acquisition advances. Whether these strategies work depends among other things on the jurisdictional regulations in the domicilie of the company that issued the shares.

Poison Pill Defense

The first poison pill defense was used in 1982, when New York lawyer Martin Lipton unveiled a warrant dividend plan; these defenses are more commonly known as shareholders’ rights plans. This defense is controversial, and many countries have limited its application. To execute a poison pill, the targeted company dilutes its shares in a way that the hostile bidder cannot obtain a controlling share without incurring massive expenses.

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A “flip-in” pill version allows the company to issue preferred shares that only existing shareholders may buy, diluting the hostile bidder’s potential purchase. “Flip-over” pills allow existing shareholders to buy the acquiring company’s shares at a significantly discounted price making the takeover transaction more unattractive and expensive.

Such a strategy was implemented back in 2012 when Carl Icahn announced that he had purchased nearly 10 percent of the shares of Netflix in an attempt to take over the company. The Netflix board responded by instituting a shareholder-rights plan to make any attempted takeover excessively costly. The terms of the plan stated that if anyone bought up 10 percent or more of the company, the board would allow its shareholders to buy newly issued shares in the company at a discount, diluting the stake of any would-be corporate raiders and making a takeover virtually impossible without approval from the takeover target.

Staggered Board Defense

A company might segregate its board of directors into different groups and only put a handful up for re-election at any one meeting. This staggers board changes over time, making it very time-consuming for the entire board to be voted out.

White Knight Defense

If a board feels like it cannot reasonably prevent a hostile takeover, it might seek a friendlier firm to swoop in and buy a controlling interest before the hostile bidder. This is the white knight defense. If desperate, the threatened board may sell off key assets and reduce operations, hoping to make the company less attractive to the bidder.

Typically, the white knight agrees to pay a premium above the acquirer’s offer to buy the target company’s stock, or the white knight agrees to restructure the target company after the acquisition is completed in a manner supported by the target company’s management.

Two classic examples of white knight engagements in the corporate takeover process include PNC Financial Services’ (PNC) purchase of National City Corporation in 2008 to help the company survive during the subprime mortgage lending crisis, and Fiat’s (FCAU) takeover of Chrysler in 2009 to save it from liquidation.

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Greenmail Defense

Greenmail refers to a targeted repurchase, where a company buys a certain amount of its own stock from an individual investor, usually at a substantial premium. These premiums can be thought of as payments to a potential acquirer to eliminate an unfriendly takeover attempt.

One of the first applied occurrences of this concept was in July 1979, when Carl Icahn bought 9.9 percent of Saxon Industries stock for $7.21 per share. Subsequently, Saxon was forced to repurchase its own shares at $10.50 per share to unwind the corporate takeover activity.

While the anti-takeover process of greenmail is effective, some companies, like Lockheed Martin (LMT), have implemented anti-greenmail provisions in their corporate charters. Over the years, greenmail has diminished in usage due to the capital gains tax that is now imposed on the gains derived from such hostile takeover tactics.

Stocks With Differential Voting Rights

A preemptive line of defense against a hostile corporate takeover would be to establish stock securities that have differential voting rights (DVRs). Stocks with this type of provision provide fewer voting rights to shareholders. For example, holders of these types of securities may need to own 100 shares to be able to cast one vote.

Establish an Employee Stock Ownership Plan

Another preemptive line of defense against a hostile corporate takeover would be to establish an employee stock ownership plan (ESOP). An ESOP is a tax-qualified retirement plan that offers tax savings to both the corporation and its shareholders. By establishing an ESOP, employees of the corporation hold ownership in the company. In turn, this means that a greater percentage of the company will likely be owned by people that will vote in conjunction with the views of the target company’s management rather than with the interests of a potential acquirer.

Shares

Shares

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

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