Foreign stockholders are having an uneven time of it with ex-U.S. stocks. Their own actions, and those of the companies they hold, are giving both retail and institutional U.S. investors a run for their money—sometimes in a good way and sometimes not—in countries from Japan to South Korea, China and even many in the EU.
In some cases it’s the companies or even foreign governments who are seeking to tighten the reins on shareholders, and in others it’s the investors who are fighting back—or launching the battle in the first place. Some investors are gaining more power, while others appear to be losing.
Savvy investors should know about these four major actions changing the treatment of foreign shareholders:
1. Toyota’s new class of stock shares:
Toyota ruffled a lot of investor feathers when it decided earlier this summer to add a new class of stock shares—one available only to long-term shareholders and only in Japan.
Foreign pension funds, including the California State Teachers’ Retirement System, the Canada Pension Plan Investment Board and the Florida State Board of Administration, and proxy advisor Institutional Shareholder Services Inc. opposed the new share class, but the Model AA shares were voted into existence on June 16—although they passed with just 75% of the vote. Company spokeswoman Kayo Doi said in reports that it’s rare for a company resolutions to win less than 90% support.
The shares sell at a 20% premium to common stock but offer a really tempting deal for long-term investors, who must hold the new class of shares for at least five years. There’s an annual dividend, starting at 0.5% and rising each year by 0.5% till it hits a maximum of 2.5%. Once five years have passed, shareholders can keep the stock, convert it to common shares or even sell it back to Toyota for the issue price.
The downside is that foreign investors are shut out. In addition, since Toyota said in a statement that it would repurchase common shares “in roughly the same number as the number of the First Series Model AA Class Shares issued,” the new shares provide “a greater voice to shareholders with medium to long term holdings.”
They also, according to opponents, create two classes of investors; foreign shareholders and those who hold common stock are relegated to second class. Although Toyota said the new class of stock was intended to help finance research and development by long-term investors, it’s also expected to help the company avoid new standards on cross-shareholding (owning the shares of other companies) with which it might otherwise have to comply.
2. Activist stockholder fight against Samsung merger:
Individual stockholders of South Korea’s Samsung allied themselves, oddly enough, with American activist investor Paul Elliott Singer and his hedge fund Elliot Associates in a merger battle that Singer said undervalued the company.
Samsung nevertheless managed to scrape together enough votes to win the day—but just barely. A two-thirds majority was needed, and the vote was 69.53% in favor after a shareholder meeting described as “heated.”
Samsung C&T Corp. did all it could to win shareholder support for the $8.3 billion merger with Cheil Industries, Samsung’s de facto holding company. Samsung, the largest family-run conglomerate, or chaebol, in the country, wanted the deal to solidify the family’s hold on the company after the group’s patriarch Lee Kun-hee was hospitalized last year.
However, Elliott Associates, the third largest shareholder with a 7.12% stake, had campaigned loudly against the deal, even taking lowball bid allegations to the South Korean court. And despite the fact that South Korean investors usually side with the home team, hundreds of small investors broke ranks to say that Cheil should offer more for Samsung.
The move follows Hyundai’s blunder last year, overpaying by more than a factor of three for real estate in Seoul—which angered stockholders. Had the Samsung merger thwarted, it could have threatened the future structure of chaebols. But for the time being, Cheil, and the family dynasty, prevailed.
3. China halts stock sales in market turmoil:
Earlier this month, China’s crashing market led the country’s securities regulator to ban major shareholders, corporate executives and directors from selling their shares in listed companies for six months.
The ban was just one in a series of big actions as Beijing sought to control investor flight. First government-owned institutions were ordered to maintain or even increase their holdings; then the China Securities Regulatory Commission went further, ordering investors with stakes of more than 5%, including mutual funds and ETFs, to keep what they had. The action, it said, was to stabilize the market amid an “unreasonable plunge” in stock prices.
Currently China is underpinning its efforts to shore up the market with an injection of $483 billion. If the move succeeds, foreign investors who hold less than 5% stakes in Chinese stocks and are therefore still able to offload them may decide to sit tight. Even more of interest: what will be the effect of the 6-month ban on foreign funds holding large amounts of Chinese stocks? It’s far too soon to tell.
4. EU Revises Shareholder Rights Rules:
European Union lawmakers are changing shareholder rights across the region. They’re following Italy and France, where long-term shareholders are, to borrow a phrase, more equal than others.
The “one share, one vote” notion of stock ownership is getting changed across Europe in the interests of fighting against “short-termism”—companies pandering to stockholders who react to short-term results.
According to the European Parliament, member states must come up with “specific mechanisms to reward long-term shareholders” that will “foster shareholders’ long-run commitment to companies, which should in turn improve their competitiveness and sustainability.” While the European Parliament said that it should be up to individual countries to define “long term,” it added that it should not be less than two years.
Among the reward mechanisms EP members suggested are “one or more” of these: additional voting rights, tax incentives, loyalty dividends or loyalty shares. But the additional voting rights provision is currently getting the most attention, particularly since Italy and France both moved ahead with their own versions last year.
In Italy, the law allows companies to change their bylaws to grant long-term investors more than one vote per share. And it has disturbed institutional investors so much that in February they got together to protest the possibility that the Italian government would change the law further—instead of requiring a two-thirds majority vote for those bylaw changes, the proposed rule would have allowed extra voting rights to be granted by a simple majority vote until the end of 2015.
But many decided they wouldn’t take that change lying down. A letter signed by 20 investment funds, including Fidelity, UBS Global Asset Management, Schroders, Amundi and Aviva, and more than 90 others—board members and academics among them—called for the country to at the very least insist on the two-thirds majority to grant these additional investor rights.
In a press release that accompanied the letter, Luca Enriques, a professor of corporate law at the University of Oxford, said that otherwise Italy ran the risk that “international investors [would] pack up and take their capital elsewhere.”
And in France, after March of 2016, the Florange law decrees that listed French firms must grant double voting rights to investors who have held their shares for a minimum of two years—unless two thirds of company shareholders vote against the rule.