How much is a vote worth?
May 23, 2024
It’s not only in relation to government that votes matter!
Were you aware that there are around 14m retail investors in listed UK equities? Over 45,000 individuals used the EIS scheme in 2022/23 and 9,950 used the SEIS scheme. It would be a guess to estimate the total number of shareholders in UK private as there are decades of historical years when shareholders invested and are still holding their shares. But as of today there are around 5.3m active companies in the UK that have been incorporated since 1980.
That’s a lot of votes!
As you will know a company’s Articles determine who has votes and how many they have. There’s also the issue of the ability to control the board by having a voting majority.
Not all votes are equal.
The most extreme example we have seen is a scenario in a company where the preference share class (under £15k) elected the company’s board (thereby controlling the company) despite there being some £10ms of equity value in the various other share classes.
We have also seen examples whereby one shareholder could command a board seat but if that director was voted against by the others, immediately he or she could vote all board decisions without opposition, including sacking all fellow directors!
Power exists in mysterious ways when it comes to private companies.
A share class can have double votes vs other share classes in a general meeting. A share class and determine the exit route for a company via drag rights.
It’s all rather fun when you think about it. And its quite possible that if the articles are not very clear, shareholders could not fully understand who can actually control future outcomes.
In the listed markets there are some companies which have both voting and non-voting share classes listed. Back in the 1990s I worked on a number of deals where non-voting shares were enfranchised and I see that Schroders enfranchised its non-voting shares in 2022. This provides some clues as to the value of a vote in a listed company. Where there are dual listings of voting and non-voting shares in the same company it’s possible to consider the difference in the two share prices to determine the value of a vote in that company. Non-voting shareholders may be unhappy about what they will receive if there is a bid for the company relative to what the voting shareholders will get – see Sony and Apollo approach Paramount Global with $26bn bid outline (ft.com)
When we are thinking about non-voting share classes in a valuation context, this sort of data gives us some useful data points.
If a new share class is being created for a scenario such as incentivising employees, its worth considering whether the shareholders actually need voting rights and, if not, whether it is worth removing them to prove that the share class’s value is denuded relative to its peers.
