What are Golden Shares?

Explanation

  • ShareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read moreof such shares have specific veto power during the voting.Generally, this can control 51% of the company’s ownership. Such shares will be held by the government or government-owned corporations or organizations specifically incorporated for specified purposes. This concept is famous in countries like Brazil, the UK, etc., to maintain control over the state-run entities.Generally, the holder will have veto power, the ability to block the major movement of ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more, and the ability to block the takeover.

The government generally maintains a significant stake in the form of golden shares during disinvestment. During the 1980s, this system was very famous in the market; however, later on, the European Union banned this practice.

Private companies also use such practices to control their group companies and prevent a third party’s hostile takeover. Often, such holding is maintained to ensure that the entity can deliver the purpose and commitment for which it is being incorporated.

Example of Golden shares

Example #1

ABC Ltd., a British company, provides aeronautical services and makes commercial, military, and agricultural aircraft. The company was a private and state-run company from its inception, and in 2016, it initiated public offerings by issuing only 49%. Nevertheless, the government maintained a 51% stake in the company. This 51% stake is nothing but the golden shares in its true essence.

Example #2

  • PQR Ltd. is a state-owned company in the UK incorporated in 1990. As per the articles, the golden shareholder can prevent any shareholder from holding more than 15% of the controlling power of the company.In 2010, the state sold golden shares as a part of privatizationPrivatizationPrivatization refers to transferring ownership, operation, and control of a government or public entity to a non-government or private enterprise.read more. With this, the race began for the takeoverTakeoverA takeover is a transaction where the bidder company acquires the target company with or without the management’s mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers.read more of a majority stake in the company. After two years of the takeover, the majority stake was taken by 12 different entities owned by the same parent company. It resulted in a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more.

Effects of Golden shares

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  • Cap Over the Maximum Voting Rights: There is an impact on majority shareholders in a meeting. Further, there will be a single majority holder who will decide which are the motions to be passed and which are to be rejected.Resolutions of the General Meeting Require 80% of the Voting Rights: Generally, 75% of the majority is needed to pass the resolution for specific businesses. However, the golden share gives the right to decide the majority and try to curb the voice of minority interestMinority InterestMinority interest is the investors’ stakeholding that is less than 50% of the existing shares or the voting rights in the company. The minority shareholders do not have control over the company through their voting rights, thereby having a meagre role in the corporate decision-making.read more.Breach of the Freedom of Establishment: Private enterprises are established to manage businesses with freedom from government interference. However, the golden share will break such freedom and not allow the management to be free of their interference.Restricted Movement of Capital: Generally, in the liberal economy, capital must be moved freely without any restrictions and limitations. However, the golden share will not allow the free movement of shareholding and will try to maintain the majority stake in the company.

Purpose

  • To maintain control of the company.It helps in playing a pivotal role in undertaking critical decisions.Ensure that the purpose for which the entity is incorporated is fulfilled.All significant decisions related to the entity will be passed through the primary investor, who has full control over the operations.It will ensure that the company will not be picked away in a hostile manner by any unwanted third party.

Advantages

  • Ability to Influence the Strategic Decision-Undertaking Process: A golden shareholder can influence all the major decision-making processes to ensure that correct decisions are being taken at the right time based on the right person’s approval.Rights to Control Changes in Ownership: Such shareholding will ensure that there will be no irrelevant and material changes in the ownership will result due to unnecessary movement of stock holding of the company. For the smooth running of the business, it is necessary to have consistent ownership with a correct vision of the business.Caps Restricting Substantial Bock Dealing of Stock: In the market, various factors disrupt the ownership and try to get the majority stake in the company. Golden share ensures such block dealings in the shares of the company.Requirements for Approval of, or Rights to Veto, Changes in Ownership by the Government: For the public sector industries like defense, railways, etc., it is of utmost importance that the benefit of the public always remains at the center. So, such a company must route any material change through the government by golden shares.

Disadvantages

  • State Interference in the Management of Private Companies: When the state owns the golden share, they will interfere in the company’s management. It will affect the performance of the firm. Many scholars have supported this view that there should be negligible or minimal state interference in the private firm.Restriction to the public for investing in the Private Company: Golden shareholders have the right to determine the cap over any investment held by individuals or groups of shareholders. Such restrictions may directly or indirectly affect the management and operation of the company, which is not a good sign for the company’s progress.Ignoring Wisdom of Other Shareholders: This is unfair because it allows the holder to ignore, overrule, or go away from all the other shareholders’ wishes or wise advice. Such a perspective hinders the growth of the corporation.

Conclusion

Golden shares play a significant role in keeping the holding of the company in the restricted mode, thereby keeping the decision-making to specific shareholders only and ensuring that the corporation can fulfill its established purpose. On the flip side, it prevents the voice of minority stake and keeps the company away from the wisdom of minority interest.

This article has been a guide to what Golden Shares is and its definition. Here we discuss the purpose of golden shares, examples, and effects along with advantages and disadvantages. You can learn more about it from the following articles –

  • Voting SharesPledged SharesForfeited SharesBonus Shares