MSC Insight
What We Learn from the “Mad Unicorn”
What’s a Unicorn?
A Unicorn is a startup term to describe a privately-owned company (as opposed to a listed company) that is valued over USD 1 billion.
Why Do Investors Want to Own Shares in a Company?
In the series, we see that the percentages of shares that investors will own are heavily negotiated. This is because the more shares you own, the more power you will have over the company. Here are examples of powers attached to shares.
Control (in terms of voting rights)
Shareholders control the company through their votes in shareholders’ meetings. In a normal circumstance (i.e. if there’s only ordinary shares in the company), 1 share equals 1 vote. Shareholders will drive the company whenever a decision of significant matters must be reached, e.g. raising of capital or company’s winding up.
Question: How many shares do I have to own to have enough control?
Answer: If you own 75% of a company’s shares, you’ll have control over all significant matters of the company, unless it is agreed otherwise in the company’s articles of association or a shareholders’ agreement, which will be discussed further below.
.Tips and Tricks
- If you hold any percentage above 25% of the company’s shares, you’ll have the “power to veto” all significant matters. This means no significant decision will be made without your consent even though your ownership of shares is much less than 75%.
- Although the law says that all significant matters will be approved if the shareholder(s) holding at least 75% of the total shares of the company cast affirmative votes, it can be agreed otherwise among the shareholders.
For example, a shareholder holding 90% of the company’s shares may say that significant matters of the company can be approved only when shareholder(s) holding at least 90% of shares cast their affirmative votes. It may be so arranged if it is agreed by the other party(ies) holding the other 10% of shares.
Important Notes: Before you invest in a company, it is wise to check first whether this kind of special arrangement is put in place. What you can do is check the company’s articles of association (which is a public document available at the Department of Business Development, Ministry of Commerce, for all to see in exchange for a small fee). Also, you may request to see the current shareholders’ agreement from the existing shareholders whether there is such arrangement before you can make a well-informed investment.
Control (in terms of management)
Only shareholders have the power to appoint directors of a company. In a normal circumstance, an appointment of directors requires only a simple majority of shareholders’ votes (meaning a votes of more than 50% of the company’s total shares).
Shareholders (with enough votes) may appoint themselves or any eligible person they see appropriate to act as the company’s director(s). The board of directors is a crucial body of the company to set directions for the company. Also, the board of directors may appoint any person to act for them in the day-to-day operation and for other managerial tasks, i.e. the C-level people, e.g. CEO, CFO or COO.
When the Company Grows, Your Shares Increase in Value
You may be familiar with the term ‘par value’ which is a value attached to a share (that the law says every share must have). The significance of par value, among other things, is that it shows how much an investor should pay (per share) when he/she invests in a company at the very start. Any amount above par value will be called ‘share premium’ which is a part of shareholders’ equity.
As time goes by and hopefully your company is profitable, it is reasonable to sell your shares above par value upon your exit. This is because, to put it simply, the shareholders’ equity will increase when there’s profit (unless there’s accumulated loss to offset with your profit).
If the company decides to cease its operation, the shareholders will receive whatever is left according to each of their shareholding percentage in the company after all of the company’s debts are repaid to creditors.
Story of the Unicorn
In the series, a shareholder first holds 19% of the company’s shares. Without any special arrangement as mentioned above, it is not enough for this shareholder to veto the ‘capital increase’ because he does not hold more than 25% of the company’s shares.
Question: What does the shareholder need to do to maintain his power in the company when there’s a capital increase?
Answer: The shareholder can buy all of the new shares increased by the company just to maintain his control. Otherwise, his control (in terms of voting) and earnings per share (EPS) will be diluted altogether. The problem will occur, however, when such shareholder lacks the source of fund.
