CFA Institute Calls for Tighter Regulations on Share Mandates to Improve Protection of Minority Shareowners

A new report by CFA Institute, the global association of investment professionals, finds that regulations in Asia are relatively permissive in allowing listed companies to conduct non-preemptive share placements that lead to dilution of minority shareowners’ interests.

The report Non-Preemptive Share Issues in Asia sheds light on the relevant regulation as well as market practices whereby existing shareowners are asked to give up their rights to subscribe to new shares issued by the company. These rights are known as pre-emptive rights. Companies typically seek approval or a mandate from shareowners at annual general meetings (AGM) to waive these pre-emptive rights as a quick and alternate option to raise capital. When granted, such mandates allow companies to issue shares to handpicked investors, and such new shares – known as non-preemptive shares – are usually issued at a discount to market price. Investors, particularly minority shareowners, typically grant these mandates without fully understanding the consequences of their action.

“We urge minority shareowners to carefully note when companies seek approval to waive shareowners’ preemptive rights at AGMs. This is not a trivial issue; multiple non-preemptive share issues lead to a greater dilution of their share ownership and rights. Before approving such mandates, shareowners should review the issues behind the proposed placings including the strength of the business case, the level of dilution of the monetary value of their shares and their control in the company, the level of transparency in the process and alternate options for companies to raise funds,” says Padma Venkat, CFA, director of Capital Markets Policy in Asia Pacific, CFA Institute and author of the report.

Key findings of the report:

• Compared to those in the UK[1], regulations in Asia are more permissive to companies and market practices allow a far larger dilution of minority shareowners rights.
  • In Hong Kong, Malaysia, Singapore and Thailand, there is no cumulative cap on non-preemptive share issuance over any period. In the UK, non-preemptive share issuances are capped at no more than 7.5 percent of a company’s share capital over a rolling three-year period.
  • In Hong Kong, Malaysia and Singapore, companies need only a simple majority (over 50 percent) for general mandate approval. In Thailand and the UK, a three-fourths majority is required. This begs the question of whether minority shareowners’ voices are really heard in markets like Hong Kong, Malaysia and Singapore.
• Investors in Asia are often given only generic information on how the share issuance proceeds are used, who the placees are, and how they are selected.
  • In Hong Kong for instance, companies are required to disclose the names of the placees only if there are fewer than six placees. But 71 percent of placements in our sample data for 2012 had more than six placees, suggesting that in these cases shareowners received only a generic description of the identity of those placees. 

To enhance investor protection, the report recommends that:

• Companies be more transparent and to provide a higher level of detail in disclosures when they seek mandates for shareowners to waive pre-emptive rights.
• Regulators consider tightening rules to better protect minority shareowners’ rights by:
  • Having a maximum limit on the number of non-preemptive shares that can be issued over a three-year period, as a proportion of the total existing share capital.
  • Requiring more than a simple majority approval for such share mandates. A three-fourths majority requirement would provide more equitable protection of minority shareowners in most Asian markets.
• Minority shareowners participate in AGMs with greater awareness, exercise their rights to ask questions and vote on resolutions, as well as pay closer attention to proxy materials.

“This latest report by CFA Institute is part of our on-going efforts to promote market integrity and help bring about greater trust in the industry. This means raising the bar on corporate governance in Asia and better defining the roles and responsibilities of various stakeholders, including the board, management and regulators to protect investor rights and interests. It also means helping investors to better understand their rights and to recognise that they too, have a role to play and they too, can make a difference,” says Dr Tony Tan, CFA, Head of Standards and Financial Market Integrity in Asia Pacific, CFA Institute.

How to obtain the report
Download a full copy of Non-Preemptive Share Issues in Asia – Role of Regulation in Investor Protection.

[1] The report compares regulations in four different jurisdictions in Asia (Hong Kong, Malaysia, Singapore and Thailand) with those in the UK, as the regulatory frameworks in these markets have been either influenced by or derived from the UK system.