Super shares

Not a few eyebrows were raised when broadcasting company GMA Network announced that it was pushing through with its planned initial public offering (IPO) next year.

Remember that the three major shareholders, namely the Duavits, Jimenezes, and incumbent chairman and president Felipe Gozon, could not agree on ensure management and ownership control even after the public listing. The Jimenezes refused to agree to Gozon’s suggestion that a shareholders’ agreement be signed prohibiting the three from selling their shares remaining after the IPO to outsiders within a certain period or longer that the prescribed lock-up period by the SEC. Gozon wanted to make sure that the likes of PLDT would not be able to wrest control from the group by cornering all the shares offered publicly (the plan is to list 20percent) and then negotiating with the Jimenezes to acquire the latter’s 35 percent stake in PLDT. Because of the impasse, GMA announced that it was indefinitely postponing the planned IPO until this problem has been resolved.

Just recently, GMA revealed that it will be pushing through with the IPO sometime second quarter of next year. Insiders revealed that instead of a shareholders agreement, Deutsche Bank has suggested a scheme that would make sure that even if a third party manages to acquire all the 20 percent that will be traded in the bourses and such party is able to convince any of the three major shareholders to sell to it, the remaining two groups will continue to have control of the company. Through this scheme, even if PLDT succeeds in mopping up the 20-percent stake if GMA out in the market and manages to convince the Jimenezes to sell their 35 percent stake, Gozon and the Duavits will continue to have voting control (although the Jimenezes insist that they have no intention of selling their shares to any group).

As planned and subject to approval by the regulators, part of the common shares of GMA will be converted into super preferred voting shares.

First, let us differentiate between common stocks and preferred stocks. Preferred shares are an entirely different type of security, affording their owners priority dividend payments and a higher position on the priority ladder in the event of a company’s liquidation or bankruptcy. Common stocks represent the lower-ranked (and much more prevalent) form of equity financing. However, a company can choose to issue different classes of common stock to certain investors, board members or company founders.

Generally, companies that choose to have multiple classes of common stock issue two classes, usually denoted as Class A and B shares. Common practice is to assign more voting rights to one class of stock than the other. For example, a private company that decides to go public will usually issue a large number of common shares, but the occasional company will also provide its founders, executives or other large stakeholders with a different class of common stock that carries multiple votes for each single share of stock. Commonly, the "super voting" multiple is about 10 votes per higher class share, although occasionally companies choose to make them much higher. Usually, Class A shares are superior to Class B shares, but there is no standard nomenclature for multiple share classes - sometimes Class B shares have more votes than their Class A counterparts. Because of this, investors should always research the details of a company’s share classes if they are considering investing in a firm with more than one class.

Usually, the purpose of the super voting shares is to give key company insiders greater control over the company’s voting rights, and thus its board and corporate actions. The existence of super voting shares can also be an effective defense against hostile takeovers, since key insiders can maintain majority voting control of their company without actually owning more than half of the outstanding shares.

When Internet company Google went public, a lot of investors were upset that it issued a second class of shares to ensure that the firm’s founders and top executives maintained control. Each of the class-B shares reserved for Google insiders would carry 10 votes, while ordinary class-A shares sold to the public would get just one vote.

Designed to give specific shareholders voting control, unequal voting shares are primarily created to satisfy owners who don’t want to give up control but do want the public equity market to provide financing. In most cases, these super-voting shares are not publicly traded, and company founders and their families are most commonly the controlling groups in dual-class companies.

Many companies in the US list dual-class shares. Ford’s dual-class stock structure, for instance, allows the Ford family to control 40 percent of shareholder voting power with only about four percent of the total equity in the company. Berkshire Hathaway which has Warren Buffett as a majority shareholder, offers a B share with 1/30th the interest of its A-class shares, but 1/200th of the voting power. Echostar Communications demonstrates the extreme power that can be had through dual-class shares: founder and CEO Charlie Ergen has about five percent of the company’s stock, but his super-voting class-A shares give him a whopping 90 percent of the vote.

There are plenty of reasons to dislike these shares. They can be seen as downright unfair. They create an inferior class of shareholder and hand over power to a select few, who are then allowed to pass the financial risk onto others. With few constraints placed upon them, managers holding super-class stock can spin out of control. Families and senior managers can entrench themselves into the operations of the company, regardless of their abilities and performance. Finally, dual-class structures may allow management to make bad decisions with few consequences.

Just asking

ICTSI’s Enrique Razon continues to insist that he is not part of the group that acquired Multi Media Telephony Inc. or MMTI from the De Venecias. Somebody very close to him asked him if the reports that he is part of MMTI are true and he categorically said no. Assuming what Razon is saying were true, does this mean that Fritz Server, formerly of Home Cable, and now head of MMTI, is using Razon’s name to gain maximum benefit from being identified with him? Whether we like it or not, Server needs Razon’s name as political cover. Without this association, his application for a 3G license and frequency with the National Telecommunications Commission or NTC given Broadband Phils.’ (predecessor of MMTI) track record is doomed from the start. But let us give Fritz the benefit of the doubt. Let him admit or deny Razon’s participation in MMTI. Just asking.

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