Dealing with Pressures6

8/7/2019 Dealing with Pressures6

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Dealing with Pressures

By

Resham Raj Regmi


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Who Makes pressure?

Company has to deal with different types of

pressure. It may be internal or external. Both

internal and external pressure needs more

attention from the management. Following aresome pressure maker.

Shareholders

Market

Regulator Stakeholders


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Shareholder can make pressure through

different means

Followings are some ways by which

shareholders can express their activism. Demand for full disclosures

Proxy fights

Derivative Law Suit

Class Actions


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Demand for full Disclosures

Demand of full disclosure can be made by

different groups. Institutional shareholders

General shareholders

Minority shareholders

Disclosure should be in certain standard

determined by legal system.


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Proxy Fights

When the Board members or the CEO do

not work as per the interest of the

shareholders, some active shareholderscollects number of proxy and make

themselves eligible for the position of the

director and try to enforce their idea. This

process is called proxy fights.


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Derivative Law Suit

Shareholders file a suit against directors onbehalf of the company.

Burden of proof lies with plaintiff (shareholders).

Award paid to the company, not to shareholders. Legal cost should be paid by the shareholders.

If shareholders win, the cost can be claimed againstthe company. If shareholders lose, shareholders have

to pay. Management is friendly to defendant director.

No action taken even when plaintiff wins.

Possibility of lawsuit is no credible threat.


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Section 140 of the Companies Act

(1)A company may file in the court a case against any director, officer

or shareholders or any person having control over the company

pursuant to the consensus agreement to have any rights and

interests of the company enforced.

(2) If the company concerned fails to institute a case under sub-section(1), any shareholder holding two and half percent or more of the

shares in the paid-up capital of the company singly or jointly with two

or more shareholders holding five percent shares may, on behalf of

the company, file in the court a case against any such director or

officer or the person having control over the company or any other

person.

(3)While filing a case by a shareholder pursuant to sub-section (2), he

shall state about what sort of effort he has made to persuade the

company to institute the case by itself.


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continued

(4)Where a case is filed pursuant to Sub-Section (2), the court may decide

whether it would be appropriate to keep on the case being run by the

shareholder or to get the company to take over the case, and if it is found

appropriate to get the company to take over the case, it may order the

company to take over the case.

(5) Any case once filed pursuant to sub-section (1) or (2) shall not be capable

of being dismissed or being compromised except in cases where such

compromise contains such terms and conditions as specified by the court.

(6)Where a case file pursuant to sub-section (2) is adjudged sustaining the

claim made by the claimant shareholder, the expenses incurred by him in

the institution of such case and reasonable expenses made for the services

of legal practitioner shall be reimbursed by the company.Where such claim

is not sustained, such amount out of the expenses incurred by the

defendant in defending such case as the court thinks appropriate shall be

reimbursed from the complainant shareholder.


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Importance of Class Actions

Empower shareholders to discipline

management especially in emerging markets

where the protection of minority shareholders is

weak.

Provide legal remedy for victims and penalize

infringers.

Enhance private enforcement of law.


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Section 138 of the Companies Act

(1) If, on behalf of a company, any director or officer of the company does any

act beyond his jurisdiction, any shareholder of such company may make a

petition to the court to prevent such act.

(2) If, based on the report received by the office pursuant to section 124 in

respect of any company, the office thinks that the business of such

company could be carried on or is being carried on in such a manner as to

be prejudicial to the rights and interests of any of or all shareholders of the

company or any specific class or group of its shareholders or that any act

done or intended to be done by the company or the failure or the company

to do any act required to be done has resulted in or would result in a

prejudice to the interests of such shareholders, the office may make a

complaint/petition to the court against such company or its directors orofficers.

(3) On receipt of a petition as referred to in sub-section (1) or (2), the court may

inquire into the concerned company or its directors or officers and issue an

appropriate order.


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Section 139

(1)Based on the ground that the business of a company is carried on or

is likely to be carried on in such a manner as to be prejudicial to the

rights and interests of any shareholder of the company or that any

act done or intended t be done on behalf of the company or the

failure of the company to do any act required to be done hasresulted in or would result in a prejudice to the rights and interests of

any shareholder, such shareholder may make a complaint/petition to

the court for an appropriate order.

(2)A shareholder who makes a petition pursuant to sub-section (1)

shall prove that the director, managing director, manager or any

officer who manages and controls the company has done or intends

to don any act with ulterior motive or made or intends to make

undue discrimination, in contravention of the memorandum of

association or articles of association or consensus agreement.


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Upon Receipt of such

application what court will do?the court may issue the following order namely:(a) Preventing the act and action done and taken against the rights and interests of any

or all shareholders and carrying of the business of the company in the future in a due

manner;

(b) Prevailing any act and action being done and taken and intended to be done and

taken or requiring to so any act not done or intended not to be done by the company;(c) Requiring to institute, on behalf of the company, a civil case against any one, in

pursuance of a direction given by the court;

(d) Requiring to buy back the shares of nay shareholder in accordance with the

procedures set forth in this Act, by reducing the capital of the company, and to return

the amount of such shares;

(e) In the event of any loss and damage being suffered any shareholder from adiscrimination made against him, requiring the company or the person making such

discrimination to pay compensation to the shareholder for the same;

(f) Liquidating the company;


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Continued.

(g) Requiring the company itself or any other shareholder of the company to

purchase the shares held in the name of any shareholder;

(h) Recovering the loss and damage caused to the company or its

shareholders from the director or officer who has caused such loss and

damage;

(i) Where the company is to buy back its own shares, issuing an order to

reduce the share capital of such company as if the share capital of such

company were reduced by it by adopting a special resolution on reduction of

share capital where the memorandum and articles of association of the

company is to be amended by virtue of such order, issuing other

appropriate order also to make necessary amendment thereto.


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Sub section 5 of the same section provides power

to seek collective remedy

(6) Where a collective remedy is demanded pursuant to Sub-Section (5), the court may

issue an appropriate order with or without making necessary inquiry into some or all

shareholders of that class.

(7) Notwithstanding anything contained elsewhere in this Act, where the court has issued

an order in a manner that the company shall not make any amendment to its

memorandum of association or articles of association or shall make an amendment to

any specific matter for the protection of the rights and interests of any or allshareholders, in such a case, no amendment shall be made to the memorandum or

association or articles of association without obtaining prior approval of the court.

(8) If a company makes any amendment to its memorandum of association or articles of

association by or pursuant to an order of the court under sub-section (7), such

amendments shall be deemed to be and amendment adopted by a special resolution

in the general meeting of the company.

(9) The Office shall make entry of the following orders issued by the court pursuant to

this section in the company register:

(a) An order issued for reduction of share capital of a company;

(b) An order issued requiring any amendment to the memorandum of association

or articles of association of the company.


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How Market Makes Pressure?

Here are some way how market can

create pressure to any company. Competition (domestic & international)

Progress of competitor

Friendly mergers

Acquisition

Hostile takeover Greenmail


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Merger, Acquisition and Takeover

Merger occurs when two companies combine to form a single

company. A merger is very similar to an acquisition or takeover,

except that in the case of a merger existing stockholders of both

companies involved retain a shared interest in the new corporation.

In an acquisition one company purchases a bulk of a secondcompany's stock, creating an uneven balance of ownership in the

new combined company.

A hostile takeover is a type of corporate takeover which is carried

out against the wishes of the board of the target company. This

unique type of acquisition does not occur nearly as frequently asfriendly takeovers, in which the two companies work together

because the takeover is perceived as beneficial.


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Greenmail

Greenmail is a concept by which money is

paid by a company (or allied company or

individual) to acquire its own shares of

stock from a shareholder who is

threatening to take control of, or unwanted

influence over, the company.


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Defense against the Market

Pressure Poison Pills

By-back of shares

White knights


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Poison Pill

Poison pill is a term referring to any strategy, generally in

business or politics, to increase the likelihood of negative

results over positive ones for a party that attempts any

kind of takeover. It derives from its original meaning of aliteral poison pill carried by various spies throughout

history, taken when discovered to eliminate the

possibility of being interrogated for the enemy's gain.

Shareholders right plan is familiar example of poison pill

in business.


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Why might a company buy

back its stock? To stop stock options given to executives from diluting the stock. The management believes the stock is low.

To prevent a hostile takeover. If the company owns a

high percentage of the shares, then it is more difficult foranother company to buy a majority of their stock.

To boost confidence in the company's stock. Buying your

own stock is telling the rest of the world that you believe

in your future prospects.

The company has a lot of cash and wants to invest back

in the company, but is unable to use the money to

expand their operations.


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What are the benefits of stock

buybacks?

If they destroy the shares, it decreases the

number of total shares outstanding, thus

increasing the company's EPS.

The increased buying can raise the stock

price.

It shows the executives' confidence in the

future prospects of the company and that

they think the stock is undervalued.


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Why might a buyback be bad?

The shares could be bought with debt.

It could show that the management can't

invest the money to better their revenues. It might be a act to try to artificially better

the image of their stock.


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White knights

In business, a white knight may be a corporation, a

private company, or a person that intends to help

another firm. It refers to the friendly acquirer of a target

firm in a hostile attempt by another firm. The intention ofthe acquisition is to circumvent the takeover of the object

of interest by a third, unfriendly entity, which is perceived

to be less favorable. The knight might defeat the

undesirable entity by offering a higher and more enticing

bid, or strike a favorable deal with the management ofthe object of acquisition.


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Pressure from Regulator

Prudent regulation

Changes in regulatory regime

Determination of extra criteria Demand of more disclosures

Punitive actions


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Pressure from Stakeholders

Employee unions

Creditors

Customers Suppliers

Professional associations

Activist group


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Any Questions?

Thank You

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Dealing with Pressures6

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