The Hindu Business Line : Power of small shareholders

We had what is now being labelled as a costly and hastily enacted Sarbanes Oxley Act in the US and similar snippets of legislation in other countries.

India reacted, but did not pass any path-breaking legislation — probably the changes to Clause 49 of the Listing Agreement could be considered to be a meek attempt in that direction.

The proposed revision to the mammoth Companies Act would have to pass many a hurdle before seeing the light of the day.

Yet, a recent significant development in Germany would probably reflect that there is no necessity for overreacting in case one wants to take action on a company that shareholders, particularly small and minority, feel is not treading the path of the righteous.

The dream run

Unlike India, where corporatisation of stock exchanges remains a dream, in Germany, Deutsche Borse (which runs the Frankfurt Stock Exchange) is a corporate listed entity and is traded like any other company.

It is common in Europe to have a two-tier board structure — a supervisory board that is supposed to protect shareholder rights and the normal board of directors.

The idea is to ensure that each act independently to ensure that checks and balances fall into place automatically and, if need be, tread on each other's toes prior to passing resolutions that are not run-of-the-mill.

The Deutsche Borse was in the hands of one Warner Seifert while the supervisory board was headed by Rolf Breur.

Seifert was supposedly doing the right things for Deutsche Borse — he took the Frankfurt Stock Exchange to an electronic trading era, and integrated clearing and settlement. Deutsche Borse was one among the top 30 companies in Germany and the picture could not have looked better.

Things were going well in spite of some pitfalls — the attempt by Seifert to merge the Frankfurt Stock Exchange with either the London Stock Exchange or the NASDAQ in 2000 could not pass through.

The end

Not willing to give up, Seifert attempted a reverse coup — to take over the London Stock Exchange in 2004. The Supervisory Board nodded in assent.

However, what Seifert and the supervisory board failed to notice was a perceptible change in the shareholding pattern of the Deutsche Borse — while 68 per cent of the shareholders were safe-as-houses Germans in 2001, it was 65 per cent not-so-safe foreign in December 2004 and an even worse 93 per cent foreign in 2005.

An intrepid hedge fund based in London — The Children's Investment Fund — decided to take on Seifert in combat by opposing his attempt.

Since the Fund held only 8 per cent in Deutsche Borse, Seifert pooh-poohed the protest.

When the protest was pursued, Seifert proposed a share buyback and special dividends both of which were thrown out of the window.

In the meantime, other small shareholders with decimal point shareholding joined hands with the hedge fund and started relentlessly opposing the attempts of Seifert and Co. Losing the battle, it was announced that both Seifert and Breur were being shown the door.

The small and mighty

This case, probably a landmark in German corporate history, reflects the power of small shareholders who join together.

This case should open the eyes of corporates in India, too, and probably warn them not to ignore the small shareholders who raise their voices in protest at annual general meetings (AGMs). They could come back for the next AGM in a much larger show of strength.

The case also reflects that no amount of legislation can take way the rights of the small shareholder.

He only has to be convinced that he is protesting for the right case and that he has the numbers to win the battle.

(The author is a Hyderabad-based chartered accountant.)

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