Question

A company controls 51% of its shares, however it would like to further increase its holdings without deterring investors; what do you advise?

common law

Answer 1

In order to maintain a high shareholding in the company, company use many methods:

• Use the money of the company (i.e. public shareholders) to increase their personal shareholding in the company:- Example:- Move the money of the company (A) to another entity (B). This entity (B) may be a subsidiary of the company or a promoter group entity.
  • If the entity (B) is a subsidiary of the company, then money may be transferred to the subsidiary by way of either investment in the shares of B or as a loan or an advance to B.
  • If the entity (B) is a promoter group entity, then usually, the money is transferred to B by way of a loan or an advance.
  • Once the entity (B) has received the money, then it buys shares of the company (A) from the open market or from other large shareholders.
  • Thereafter, the promoters include the shares of the company (A) owned by the entity (B) in the Promoters’ Category and disclose a higher promoters’ shareholding in the company.
• Using company resources (trusts) to give an impression to the outside world that they still own a large shareholding in their company, even though they may not actually have a large shareholding.
• Creating complex transaction structures (e.g. ESOPs, stock warrants etc.) to get preferential treatment from the company over other shareholders to get more shares at a cheaper cost than the market or what is available to other shareholders. Therefore, increase their shareholding in the company at a comparatively lower cost.