Definition
Golden shares are a type of share that gives its holder special voting rights, allowing them to control or veto changes to a company’s structure or operations. They are often held by a government organization to retain power over a privatized company. Despite their name, golden shares typically do not provide a higher financial return to their holder.
Key Takeaways
- Golden Shares refer to a nominal share that is able to outvote all other shares in certain specified circumstances, often held by a government organization, in a government company undergoing the process of privatization and transformation into a public company.
- This special share holds special voting rights, empowering its holders with a decisive vote, thus providing them with control over the entity. This is particularly advantageous when the company is subject to a takeover, thereby allowing the holder to block potential takeovers.
- While Golden Shares can protect a company from hostile takeovers, they can also hinder free trade, and as such, have been the subject of disputes in international trade law. Particularly in the European Union, the Court of Justice has ruled them to be against the EU law of free movement of capital in many instances.
Importance
Golden shares are significant in corporate financing because they offer the holder, often the government, unique control over a corporation.
This control can pertain to critical decision-making processes or changes to the company’s structure, such as veto powers on mergers and acquisitions, or the selection of board members.
The purpose of golden shares is to protect a company against hostile takeovers, maintain its strategic orientation or safeguard national interests.
However, the use of golden shares can also raise issues of unfair practices or unequal distribution of voting rights among shareholders.
Therefore, this finance term is crucial in the context of corporate governance and control.
Explanation
Golden shares refer to a type of share that is owned by a private company, but carries special voting rights, enabling the holder to block potential takeovers or acquisitions by other companies. Essentially, it endows the holder with definitive sway over key decisions while preserving the private structure and autonomy of the company.
The idea behind golden shares is to prevent unwelcome takeovers and fend off investors that may not have the company’s long-term success at heart. It is a tactical instrument used to guard against hostile buyouts and protect strategic industry sectors.
Typically, government entities are the holders of golden shares, particularly in companies that were formerly state-owned before undergoing privatisation. In these situations, golden shares serve to ensure the government can retain a level of influence or control in the company, especially when the company represents a strategic or national interest.
This, in turn, ensures that the company cannot make big decisions without the government’s say-so, establishing a safety barrier against the possibility of the company’s assets falling into potentially adverse hands. Apart from vetoing over unwelcome takeover attempts by foreign investors, golden shares also let the holder influence the company’s operations to suit public or national interests.
Examples of Golden Shares
British Petroleum (BP): The British Petroleum Company, a multinational oil and gas company, once had a golden share held by the UK government. This was ultimately relinquished in
The golden share allowed the government to block any potential takeovers of the company and aided in preventing the company’s assets from being sold off.
Rolls-Royce: The British government also held a golden share in Rolls-Royce, a firm best known for its aero-engine business. The golden share provision allowed the government to veto or approve any potential mergers or acquisitions, a significant element in the company’s protection against foreign takeovers.
Volkswagen AG: In the case of Volkswagen AG, the state of Lower Saxony in Germany held a golden share, enabling it to resist any attempted takeovers from outside parties. This allowed the state to maintain a significant control over the company, as they had the power to block any potential unwelcome bids or takeovers. This golden share was challenged by the European Court of Justice in 2007 as it violates the EU laws about the free movement of capital.
Frequently Asked Questions about Golden Shares
What are golden shares?
Golden shares refer to a unique type of share that gives its holder veto power over changes to the company’s charter. This usually applies to a situation where the government retains some control over the privatized company.
How do golden shares work?
Golden shares give their holders the right to veto or overrule certain types of corporate actions, like a takeover by another company. These shares do not come with additional voting rights or dividends, but they can be a powerful tool in making corporate decisions.
What is the purpose of golden shares?
The main purpose of golden shares is to give its holder the ability to block decisions that may be detrimental to their interests. It’s largely used by governments to retain a level of control over privatized companies.
Are golden shares legal?
The legality of golden shares varies by jurisdiction. In some European countries, they are deemed incompatible with the principles of the free movement of capital and the right of establishment. However, other locations may allow them under certain circumstances.
Can golden shares be sold?
Golden shares are typically not sold as they are meant to protect the interests of the initial holder, often the government. If they were sold, it would defeat their purpose of stopping unwanted takeovers or changes.
Related Entrepreneurship Terms
- Preference Shares
- Voting Rights
- Company Ownership
- Shareholder Privileges
- Acquisition and Takeovers
Sources for More Information
- Investopedia is a comprehensive online resource dedicated to finance and investment education, including concepts like Golden Shares.
- Corporate Finance Institute offers professional financial training and certification programs. They also provide detailed information on a variety of financial concepts and terms.
- MarketWatch is an online platform providing financial information, business news, analysis, and stock market data. It might have data and news related to Gold Shares.
- The Economist is a weekly newspaper focusing on international politics, business, science, technology, and culture. They often provide in-depth articles on financial and economic concepts.
