Shaftesbury PLC, an AGM in practice
A look at Shaftesbury PLC, a property investment company in London’s West End, gives a flavour of how one particular company’s 2005 AGM altered the company’s articles of association.
Among the changes to the company’s articles of association proposed to the AGM in January 2005 were a proposal relating to uncertificated (ie, non-hard copy) shares, another allowing for electronic communication with shareholders, a third adjusting the rules for announcing changes to the time or place of a general meeting and a fourth altering (downwards) the amount of borrowing the directors could authorise without the specific authority of a general meeting of shareholders.
The explanatory notes make clear that the first two items comply with specific pieces of legislation. [7]
How big is the corporate action universe?
Before looking at particular types of corporate action, it is worth pausing for a moment to consider the sheer numbers of corporate actions taking place every year.
In 2004 the number of corporate actions taking place worldwide was estimated to be close to one million. [8] Given that each corporate action affects thousands of shareholders and that processing every corporate action involves several organisations in communicating and checking information, it will be clear that corporate actions administration requires huge effort and constitutes a complex industry. This industry is carried on away from the attention of the media, and the investor, for the most part. According to SWIFT the volume of corporate actions message traffic was 45 million in 2005, double the amount of 2002. [9] Completing corporate actions takes a lot of work and represents a substantial hidden cost for investors.
Endnotes
3 The shareholder’s lack of control over events affecting their investment will be looked at in more detail in Chapter 7. [return to text]
4 The significance of the 75% hurdle for special resolutions was demonstrated at the Northern Rock EGM in January 2008 when a number of rebel resolutions received the support of the simple majorities of shareholders represented, but failed because support fell short of the 75% level. As a rule, reporting on shareholder meetings in the press is strong on comment and short on detail. The most detailed source of information is likely to be the website of the company in question. [return to text]
5 This is available on the web at: http://delcode.delaware.gov/title8/c001/sc01/. The general distinction between corporate governance, a state matter, and securities trading, a federal one, has become less clear cut since the passing of the Sarbanes-Oxley Act in 2002, the biggest incursion of federal power into corporate law since the 1930s. These variations between the states are more than cosmetic. For example, states like North Carolina would allow creditors to make claims against shareholders who had received ‘excessive dividends’, limited liability notwithstanding. [return to text]
6 These include Florida, Georgia, Indiana, Virginia and Washington. [return to text]
7 Although company borrowing does not fall under the heading of corporate actions, technically speaking, and does not affect shareholders directly, as an alternative to share issues as a method of raising capital it merits the same kind of consideration by shareholders as real corporate actions. This area will be considered in more depth in the following chapter. [return to text]
8 ‘Corporate Action Processing, What Are the Risks?’ (Oxera, 2004) estimated that there were 935,200 corporate actions relating to equities that year, of which approximately two-thirds were North American and one-fifth European. [return to text]
9 Society for Worldwide Interbank Financial Telecommunication. Part of the increase is due to the recovery of stock markets from the bursting of the dotcom bubble. The volume of corporate actions normally peaks in May, reflecting the large number of corporate actions that take place in the spring results season. [return to text]
2. The Main Corporate Actions
A teeming universe of corporate actions
Estimates of the number of kinds of corporate action vary, partly because there are different definitions of what constitutes a discrete event and partly because new corporate actions are invented. [10] A conservative estimate of the number of types of corporate action would be around 70, [11] but others have put the total at over 150. [12] Thankfully, there are a small number of types of corporate action that are a long way out in front in terms of their importance, and this chapter will look at these in more detail.
Dividends
This must be the most familiar (and easily understood) corporate action of them all. It is also the most common type of corporate action – accounting for slightly less than 30% of all actions. A dividend is a distribution of cash to shareholders in proportion to their equity holding. No company is compelled to declare a dividend and those that do may vary the amount. Typically, a company will pay an interim dividend and a final dividend. The dividend is normally contingent on the approval of the AGM.
Some historical background on dividends
The modern use of the word dividend in English, as the share of the profit of a joint stock company, goes back to the early seventeenth century. The first companies paying dividends were the overseas trading companies such as the Dutch East India Company (the Vereinigte Oostindische Compagnie or VOC), which paid dividends varying between 12 and 75% a year in the seventeenth century. However, VOC shareholders did not always receive their dividends in cash; payments with VOC bonds or in kind (spices) also occurred, explaining why the shareholders were called the “pepper sacks of Amsterdam”. [13]
The importance of dividends naturally varies from one company to another and there are also cultural differences in attitudes to dividends from one country to another. Generally speaking, dividends are more significant for shareholders in the UK than in other parts of the world, but the sad truth is that the long-term trend for dividends has been downwards, with the most marked decline occurring in the United States. The importance of dividends is always going to be relative to other factors. For instance, at a time when low rates of interest prevail, like the beginning of the current decade, company dividends will seem comparatively attractive. By contrast, when share prices are rising steeply the attractiveness of the dividend is likely to be overshadowed. This, too, has been the state of affairs in the ten years to 2006 when dividends contributed just 8% of the total return to shareholders from their shareholdings. Changes to the tax regime of the shareholder may make it more advantageous for them to receive entitlements such as return of capital rather than dividends. However, in the UK share dividends are treated more favourably than income derived from other kinds of savings. [14]
Dividend yields
The size of the dividend is the key component of the dividend yield, one of the basic ratios used for evaluating shares and their price.
Dividend cover
A tool for checking how affordable a dividend is by calculating how many times over the company could afford to pay the dividend out of its after-tax profits.
Of course, in the long term every company must be able to afford its dividend and there are no guarantees that a company that has been paying high dividends might not to have to cut the dividend in the face of a drop