FINANCIAL MANAGEMENT : Choice of corporate structure
Shareholder structure explains how power is distributed among a company's different shareholders or groups of shareholders. Major shareholder categories are as follows:
- family shareholders. This model is in decline. New industries require too much capital for a family-owned structure to be viable. Funding requirements make capital markets become increasingly important;
- business angels who invest at the most risky stage of a company: its creation or shortly afterwards;
- investment funds (private equity) whether they are venture funds, LBO funds, capital development funds, etc;
- institutional shareholders (insurance companies, pension funds, unit trusts, etc.) who are becoming less passive;
- employee-shareholders. Normally these shareholders are loyal and non-volatile, lending a degree of stability to the capital;
- governments, the importance of which is rising due to sovereign wealth funds mainly originating from emerging markets.
Defensive measures for maintaining control of a company's capital carry a cost, because they prevent investors from taking advantage of the potential opportunities a takeover might create.
These measures include:
- separating management control from financial control through double-voting shares, holding companies, limited share partnerships, investment certificates and non-voting shares;
- controlling shareholder changes through right of approval clauses or pre-emption rights;
- strengthening the position of loyal shareholders by carrying out reserved capital increases, buying back shares, merging, encouraging employees to become shareholders and issuing warrants;
- exploiting legal and regulatory opportunities: specific regulations, voting right limitations and poison pills.
The best protection against a change of control is a good operating performance and a high share price which make shareholders happy and loyal.
Tax considerations aside, whether a group is made up of subsidiaries or divisions depends on control and organisational factors. Listing certain subsidiaries gives the group access to additional equity capital without changing the shareholder structure of the group. But such carve-outs risk transforming the parent company into a financial holding company.
Lastly, remember that shares with low market liquidity, shares of a holding company or conglomerate or shares without voting rights often trade at discounted values. These discounts increase the cost of capital.