1 authorised share capital

2 dividend

3 issued share capital

4 ordinary share

5 pre-emption rights

6 preference share

7 rights issue

8 subscriber

a someone who agrees to buy shares or other securities

b offer of additional shares to existing shareholders, in proportion to their

holdings, to raise money for the company с type of share in a company that entitles the shareholder to voting rights and

dividends

d entitlement entailing that, when new shares are issued, these must first be offered to existing shareholders in proportion to their existing holdings

e maximum number of shares that a company can issue, as specified in the firm's memorandum of association

f proportion of authorised capital which has been issued to shareholders in the form of shares

g type of share that gives rights of priority as to dividends, as well as priority

over other shareholders in a company's winding-up h part of a company's profits paid to shareholders

Underline the words (1-5) in the text. Then match them with their synonyms (a-e).

4 According to the text, the minimum amount of share capital of a public limited company in the UK is £50,000. Do similar restrictions apply in your jurisdiction? If so, what are they?

Read the information in the table below about the two basic classes of shares: ordinary shares and preference shares. Using the prepositions explained above, make sentences contrasting the two share types.

example:

1 Unlike ordinary shares, preference shares do not usually entitle the shareholder to vote.

In contrast to ordinary shares, which entitle the shareholder to vote, preference shares do not usually give such a- right to the shareholder.

Reading 2: Shareholders and supervisory boards

The excerpt on pages 38-39 deals with the topics of shareholders' rights and the role of the supervisory board. It is part of the required reading in a comparative law course dealing with European and Anglo-American company management structures.

Read through the text quickly and answer these questions.

1 What basic rights does a shareholder possess?

2 What options does a dissatisfied shareholder have in the Anglo-Saxon system?

3 What is meant by the concepts of the one-tier board and the two-tier board? (Note: the word tier means 'rank' or 'level'.) Which do you think is the best model of organisation?

Shareholders

A Shareholders are the owners of the company's assets. Normally, ownership of an asset entails a number of rights: the right to determine how the asset is to be managed; the right to receive the residual income from the asset; and the right to transfer ownership of the asset to others. The last two clearly apply to shareholders, but what of the first? Can shareholders exercise control if the directors fail to protect their interests?

В Two factors keep them from doing so. Both are related to the spreading of ownership needed for risk diversification in large corporations. In return for the privilege of limited liability under law, shareholders' powers are generally restricted. There is the AGM to approve the directors' report and accounts, elect and re-elect the board, and vote on such issues as allowed for in company legislation. But, apart from this, shareholders' rights are limited to the right to sell the shares. They have no right to interfere in the management of the company. Awkward questions can be asked at the annual meeting, but the chairman of the board usually holds enough proxy votes to hold off any challenge.

С The second factor is in many ways more fundamental. An essential requirement for the exercise of effective control is the possession of an adequate flow of information. As outsiders, shareholders face considerable obstacles in obtaining good information. Then there is the free-rider issue. Any one small shareholder investing in the information needed to monitor management will bear all of the costs, whereas shareholders accrue benefits as a group. Moreover, co-ordination of monitoring efforts is not easy to arrange. Often it is easier for the shareholder to sell the shares, and thus vote with one's feet.

D In short, someone with ownership rights in a company can express their disappointment with the company's performance by either getting rid of their shares or in some way expressing their concern. Hirschman (1970) called this the dichotomy between 'exit' and 'voice'. Where there are obstacles to the exercise of voice, the right of exit and transferring ownership to another party becomes not so much the accompaniment but the substitute for the other two components of ownership rights.

Supervisory board

E Not all market systems prevent shareholders from directly influencing management. In Germany, for example, the use of 'voice' is encouraged through the accountability arrangements of the Aufsichtsrat (supervisory tier). In the Germanic countries, there is a formal separation of executive and supervisory responsibilities. With the Anglo-Saxon one-tier board, managing executives are also represented on the board, and all directors, executives as well as non-executives, are appointed by the controlling shareholders and must answer to the annual meeting. A two-tier board consists of an executive board and a supervisory board. The executive board includes the top-level management team, whereas the supervisory board is made up of outside experts, such as bankers, executives from other corporations, along with employee-related representatives. There is reliance on the supervisory board for overseeing and disciplining the management as well as for co-operative conflict resolution between shareholders, managers and employees.

F This control function has a broader setting than in Anglo-Saxon countries, for in the Germanic countries, the supervisory boards of large companies are legally bound to incorporate specific forms of employee representation. Under co-determination laws, some corporations with at least 500 employees, and all those with more than 2,000 employees, must allow employees to elect one half of the members of the supervisory board. Co-determination rules cover the supervisory board, the functions of which are to control and monitor the management, to appoint and dismiss members of the management board, to fix their salaries, and to approve major decisions of the management board. In 1998, the power to appoint auditors was vested with the supervisory board (Organisation for Economic Co-operation and Development (OECD), 1998).

G How effective is this 'voice'? Obviously, it allows a participatory framework between shareholders, managers and employees under the co-determination principle, but the supervisory-board system also is designed for overseeing and constraining management. The OECD argues that 'the degree of monitoring and control by the supervisory board in the German two-tiered board system seems to be very limited in good times, while it may play a more important role when the corporation comes under stress'. Of course, the same is true of Anglo-Saxon boards; they exert more authority in a crisis, too. But the boards in Anglo-Saxon countries have not been notably successful in preventing crises. Does the Germanic-type system of board structure do better? There is not much evidence on this point. Some argue that the system encourages worker commitment to the firm and reduces day-to-day interference in management decisions, allowing both to get on with the job. Others consider that the system encourages 'cosiness', with bad strategic decisions internalised rather than subjected to the public gaze as occurs when the 'exit' option is followed.