A couple of weeks back, I was at a lunch presentation where a fund manager shared with us their experience of investing into emerging markets.
One topic which they covered was how they uncovered some companies which had violated the shareholder rights.
Here are some interesting examples:
1) A listed timber company sold exclusively through an unlisted sister company in another country. The sister company was owned by the controlling (family) shareholders of the listed company. The unlisted company made all the profits, and the minority shareholders of the listed company ended up with nothing.
2) A chairman of a company proposed a management buy-out (MBO) backed by a private equity group. The deal extracted the most valuable parts of the firm into a private company which the management intended to buy over. Even though the deal required the approval of the minority shareholders, the management and interested parties were allowed to vote. As a result, minority shareholders ended up with an almost empty shell.
3) An electronics company issued bonds with warrants to the chairman’s son only. The warrants came with a massive discount to the market price of the shares. As a result, the other shareholders faced a massive dilution of their shares.
4) A poultry feed company wrote off its investment in a slaughterhouse. The slaughterhouse was reported to be bankrupt and transferred with no consideration to the majority shareholder of the feed company. Three years later, the company announced that they were buying the slaughterhouse from the majority shareholder for a large sum of money.
Some of these had taken place many years ago, when corporate governance in these countries were still pretty bad. Nevertheless, one should always be alert to look for any kind of suspicious behavior when doing our own investing.