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Shareholders - have your say


One of the best ways to protect your share investments is to take the time to read and understand the documents you get from your companies.

As a shareholder of a company you will regularly receive quite lengthy documents from your company. How do you react when you get such documents? Do you: It is important, however, that you read these documents. This is because they often ask you to vote on important proposals affecting your company and therefore your investment. They also give you information about your company.

(In this document words that are in bold are explained in the Definition of terms.)


Types of documents you get


Your first step should be to work out exactly why you have been sent the documents. Are you being: Under the Corporations Act 2001 (the Act) companies must get shareholder approval for certain matters and proposals. If your company is listed on the stock market, the rules may also require shareholders to approve some proposals.

If you are being asked to vote on a proposal you will usually receive a Notice of Meeting and an Explanatory Memorandum. Start by reading the Notice of Meeting. The proposal, in the form of a resolution, will usually refer to the section of the Act which requires shareholder approval to be obtained, for example: Sometimes the proposal will involve more than one of these transactions. For example, a shareholder approved acquisition may also be a related party transaction and a scheme of arrangement may involve a capital reduction.

Understanding company documents


Take the time to read and understand the documents you've received. It is the responsibility of your directors to write them in understandable terms. However, some proposals can be complex and may require a close reading in order to be understood. See Using annual reports to judge a company's performance.

Perhaps after a careful reading, you cannot understand the documents, are worried about how an issue is described in the documents or cannot find an answer to your questions. Maybe your company hasn't given you enough information to make an informed decision. If this happens you can:

Proposals breaching the law


If you think the proposal is not in your company's best interests or breaches the Act then vote against it. You may also want to complain to ASIC on 1300 300 630.

You should be concerned about proposals to:
See also Understanding company directors' responsibilities.


Is this in my best interests?


When you vote on a proposal you should vote for what is in your best interests. Here are some questions you should ask yourself about a proposal. You should find the answers to these questions in the documents you've received. Not all these questions will be directly relevant to every proposal you receive. However, these questions will help you build up the knowledge you need to make up your mind on a proposal.


Impact on your investment


How will I be affected if the proposal goes ahead?
Your stake in the company may be changed by the proposal. Therefore, before you vote on the proposal, make sure you understand its effect on you.

Quite often this is up to you. For example, in a share buy-back you may receive an offer to sell your shares back to the company and in a takeover you will receive an offer for your shares. In other cases, it may not be that simple. If shares are being allotted to other shareholders, even if the number of shares you own does not change, you may end up owning a smaller percentage of your company. A typical example is when options are given to directors. When the directors exercise those options and get shares, your percentage of shares in the company may be decreased.

Are they offering me a fair price for my shares?
You may be asked to sell your shares for cash or you may be offered shares in another company in exchange for your shares. In either case you will want to know how much you will be getting for your shares and whether you are getting a fair price. The price you are offered for your shares will be fair if you are getting at least what they are worth.

If there is an expert report included in the documents then it should tell you whether the proposal is fair. Read the expert report. You don't have to understand every word to get a feel for what they think of the proposal.

Even if there is no expert report, the documents should clearly explain to you what you will be getting for your shares. They should contain enough information for you to determine whether the price being offered for your shares is fair.


Impact on your company


Why is my company doing this?
Try to understand why your company is making this proposal. Then you can decide whether it is in your best interests.

Find an explanation for the proposal in the company's documents. Does it agree with what you have read in the financial press or with what the company's officers have told you? If you are not comfortable with the reasons given, try to find out more about the proposal. Consider getting advice from an independent financial or legal adviser if you don't think you understand the pros and cons of the proposal.

What are the costs and benefits of the proposal? What are the alternatives?
The documents should give a balanced view of the costs and benefits to your company of the proposal. Make sure you understand the costs and benefits of: Is my company getting more than it is giving up?
Sometimes you will be asked to vote on a proposal which only indirectly affects you. For example, your company may be buying an asset and paying for it with cash, or by issuing shares, or even by reducing the debt that the other party owes your company.

Consider whether the price is fair. If you decide the price is not fair, you may want to vote against the transaction. If your company pays too much for the asset, your shares may not be worth as much after the transaction as before it.


Impact on the directors


Always look carefully at proposals which benefit the company's directors. Ask yourself whether you think the directors would be getting the same deal if they were not directors? If the answer is "no" it may still be okay .They may, for example, be getting options instead of a salary or as an incentive-but think carefully about the proposal. Ask yourself:

How much are they getting?
Reading the directors' recommendations

If your directors have shares in the company, you may get some comfort from knowing their intention. This is especially true if they hold a large number of shares.

In some cases directors have a duty to make a recommendation to shareholders. Their recommendations should be in the best interests of the company as a whole, including you. Therefore, you may want to take special notice of what each director is recommending and why. Directors should not make a recommendation if they are benefiting from the proposal over and above any benefit they will receive as a shareholder. If a director makes a recommendation in these circumstances, they should clearly state what they have to gain from the proposal. You should assess their comments in the light of their interest in the proposal.

Remember, even if the directors think the proposal is in the best interests of the company, or the shareholders as a whole, only you can decide what is in your best interests.

Looking at the purchaser



Does it really matter to me who buys shares in my company?

This may not seem particularly important, however it may be. For example, if a company wants to acquire a large parcel of shares in your company, you need to ask yourself, "Do I want to be a shareholder in a company controlled by that company?"

In such a situation you should be told: If the purchaser is an individual then you have the right to know similar information about them. You generally need to know more than just their name.

If you're asked to swap your shares for shares in another company, then ask yourself, "Do I want to be a shareholder in that company?" Look for information about the purchaser and for a consolidated balance sheet. The balance sheet shows the effect of combining the assets and liabilities of the two companies. It will help you understand what the company in which you will become a shareholder will look like if the proposal succeeds.


Annual general meetings


You will be told when the annual general meeting (often called AGM) of your company is to be held. AGMs are generally held by public companies once every calendar year. Matters usually considered at an AGM are the: The chair of an AGM must give shareholders a reasonable opportunity to ask questions about, or make comments on, the management of the company.

See Using annual reports to judge a company's performance.


Why should I read the financial and auditor's reports?



Before an AGM you will usually receive an annual report, containing the directors' report, the financial statements and other management reports on the company's activities. Read these reports and work out how the company is going.

The financial statements are often neglected by shareholders. However, they contain vital information about, for example, profits and losses and the company's assets and liabilities (including its debts). Unless you specifically ask to be sent full financial reports, the company may send you a concise report. In either case, read the report(s). If you do not understand them, ask an independent accountant or financial adviser. You can also ask questions at the AGM.

Look also at the auditor's report, especially to see if the report is "qualified" . A qualified report will tell you why the auditor was not completely satisfied. If the auditor is at the AGM you can generally ask them about the preparation and content of their report.

Can I have my say about who is a director?



Quite often at an AGM you will be asked to re-elect one or more directors or approve the appointment of a new director:
  • Before you decide to re-elect a director think about whether you are happy with the performance of your company. Remember you can ask questions or comment on the management at the AGM.
  • If a new director is to be appointed make sure you are given enough information to decide whether this is the person you want managing your company.
More about how you can influence company policy


How to exercise your vote


The documents you receive may ask you to vote on a specific proposal.


What to do if you can't attend a meeting


You may still be able to vote without attending a meeting. Look at the documents. Do they include a proxy form and/or a statement about the right to appoint a proxy? If they do, then you can still vote.

A proxy is someone who you choose to attend the meeting on your behalf and to vote for you. Sometimes you can tell your proxy how to vote and other times you may leave it up to them. Read the document for information about this.

The company may send you a list of people who are willing to act as proxies at the meeting. You can choose one of those people to act as your proxy or you can choose some other person. Shareholders can nominate the Australian Shareholders' Association as their proxy, whether they're members or not. The ASA have a form to make it easy for you to nominate the ASA as your proxy.

Be careful when completing the proxy form. Make sure everything is completed. Don't forget to sign it, otherwise it may be invalid and your vote will not be counted. Usually, you must complete the proxy form and return it by a certain date. This date will be stated in the document. (Usually, proxy forms must be received at least two days before the meeting.)


Takeovers


Takeover offers are made when a shareholder (or prospective shareholder) wants to have more than 20% of the shares in your company.

A takeover offer is made to all of the shareholders (unlike a shareholder approved acquisition). Everyone gets exactly the same offer. You will be asked to sell your shares for cash or you will be offered shares in another company in exchange for your shares (or a combination of shares and cash).

You will get documents about a takeover offer: In the target's statement you will get your directors' recommendations on the offer. They will recommend whether you should accept or reject it. However, it is up to you to decide whether to accept or reject an offer.

If your directors have recommended shareholders reject the offer, and you have decided to follow their recommendation, do not leave it at that. Things can change very quickly during a takeover. It is important for you to keep abreast with the financial press and ASX company announcements. The bidder may increase the bid sufficiently for your directors to change their recommendation.

A week is a long time in a takeover, especially the last week. A bid that is apparently unsuccessful can change radically if a large shareholder accepts and other small shareholders decide to follow. Don' t be caught unaware. Again, keep abreast with the financial news.

It can be wise not to accept the offer too soon, in case a more attractive offer is made by a rival bidder. If you accept the first offer you cannot accept the second. Again, the press will be abuzz with news of a potential rival bidder if they foresee another offer. Also, if your shares are trading above the offer price, it could be that the market has factored a higher bid into the price. If this is the case, it is usually best to hold tight until close to the end of the offer period.

ASIC has published an information sheet Takeovers - information for shareholders. It contains some basic information about how takeovers happen, what rights you have as a shareholder and how to make the best use of your rights.


Capital reductions



The most common type of capital reduction is when a company cancels a number of its shares. This can take a variety of forms. It may involve: A selective capital reduction is sometimes called "removing minorities". A company may want to do this so it can integrate its business with other businesses of the group. This means it can benefit by getting all the profits of the businesses and better taxation arrangements.

In a selective capital reduction, not everyone is treated equally. There is nothing wrong with this if the proposal is approved by the shareholders and the shareholders are paid a fair price for their shares. However, if your shares are to be cancelled then the company should explain to you why another shareholder is to remain as a shareholder and you are not.


Related party transactions


Your company may want to enter into a transaction with someone who has a close, and possibly privileged, relationship with the company. Parties in this close and privileged relationship are called 'related parties'. Related parties of a company include directors of the company, their immediate families and companies that they control.

Sometimes the law requires a majority of shareholders to approve this type of transaction. Parties to the proposed transaction, and their associates, cannot vote on the proposal at the meeting.

We have found common defects in related party documents sent to shareholders.


Schemes of arrangement


A scheme of arrangement rearranges the rights and obligations of a company's: When creditors or shareholders agree to a scheme of arrangement, all creditors (or shareholders) are bound by it.

You are more likely to come across a members' scheme. Typically, a members' scheme is a plan by which the company is reorganised in some way that affects members' rights or interests.

Sometimes a scheme will look like a "friendly" takeover. You may be offered shares in another company in exchange for your current holding.

Sometimes a scheme of arrangement may be conducted in conjunction with the cancellation of some, or all, of the shares in your company.

A scheme of arrangement must also be approved by the Court. If you have any objections to the scheme, it may be possible to raise your concerns with the Court.


Share buy-backs


A share buy-back is when a company makes an offer to its shareholders to buy back some of its own shares. There are several types of buy-backs. Two common types are: After the shareholders of the company have approved the share buy back, each shareholder, whose shares the company wants to buy back, will receive an offer. Each shareholder must then decide whether they want to sell their shares.

A company may want to buy back its shares for a number of reasons, for example, to: More information about share buy-backs


Shareholder approved acquisitions


Shareholder approval may be required when an acquisition of shares results in a shareholder ending up with more than 20% of the shares in the company. This could occur when your company is buying an asset and is paying for it by issuing shares to the person selling the asset. Another example may be when your company wants to raise funds and an individual is willing to inject funds into the company in exchange for shares.


Is the purchaser paying a premium for the shares?


When one shareholder is selling a controlling parcel of shares, the purchasing shareholder will often pay more for the shares than it would if it was not getting control. This is called paying a premium for control.

In a takeover situation, everyone is able to participate in the premium but, in the above example, only the selling shareholder does. In such a case, ask yourself if other reasons for the proposal make up for the fact that you will not be participating in this premium.


How much of my company will the purchaser end up with?


Look to see what percentage of your company the purchaser could end up with. Make sure the maximum percentage is absolutely clear from the documents.

Also, look at how long the person has to acquire the shares. Companies frequently issue convertible notes and options which allow a period of time for the person to acquire shares. It is important to consider how your company might change in that period, and whether you are prepared to give approval for an acquisition that far into the future.


Insolvency


You can be affected by a company's insolvency as a shareholder, investor, employee or creditor of the company. Find out more.


Definition of terms


Annual report
A company's annual report sets out a detailed financial picture of the company, including the balance sheet, profit and loss statement, statement of cash flows, directors' statement and auditor's report. The annual report also includes details of the company's operations over the past year, what the company does and what it is planning to do and the directors of the company.

Assets
The resources owned by a company, fund or person. Assets can be tangible (eg cash, investments, property and equipment) or intangible (eg goodwill, patents).

Australian Securities Exchange (ASX)
The national Australian exchange through which shares and other securities are bought and sold.

Balance sheet
See Financial statements

Financial statements
Reports containing information about the financial position of the company. Financial statements include the balance sheets, profit and loss statements and statements of cash flows.

Liabilities
The opposite of assets. A person's debts or a company's debts.

Option
The right to buy or sell shares or securities at a set price and within a set period. The buyer has the right, but not the obligation, to buy or sell. If the option is not exercised, the buyer forfeits the money paid for the option (the option premium).

Securities
This is a generic term used to describe many types of financial instruments which are traded in financial markets (other than futures contracts), the most common example being shares.

Shares
Part of the ownership of a company. The shareholder buys part of a company's capital and receives certain legal rights in return. There can be various classes of shares, the most common being ordinary shares. Shareholders may receive dividends. And they generally have the right to vote in general meetings (on matters, for example, such as the election of directors).

Takeover
When one company makes an offer to another company's shareholders, to acquire their shares in enough quantities to get a controlling interest in that company. Takeovers in Australia are regulated by the Corporations Act 2001 and a strict protocol of rules and regulations exist to protect the interests of shareholders.


Who can help you?


Australian Securities and Investments Commission (ASIC)


ASIC is the company and investor watchdog. We protect investors by making sure their rights under the Corporations Act 2001 are protected. We can tell you if you have received the information you are entitled to, but cannot advise you about the merits of a proposal. If you have any questions, or want to make a complaint, contact our Infoline at infoline@asic.gov.au or on 1300 300 630.


Australian Shareholders' Association (ASA)


The ASA is an organisation which represents shareholders. It holds regular meetings which enables members to get in touch with other shareholders. The ASA also represents the interests of shareholders at company meetings and often assists members by asking their questions at company meetings. You can nominate the ASA to be your proxy at meetings. If you have an enquiry, phone the ASA on 1300 368 448 or visit its website at www.asa.asn.au.

Lots more information about investing in shares
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