Magazine article Global Finance

Beware of Shares That Mutate

Magazine article Global Finance

Beware of Shares That Mutate

Article excerpt

It was the loudest shot yet in what promises to be a long conflict between shareholders and managements of corporations around the world. Australian gambling enterprise Crown canceled its November 14 meeting of shareholders over concerns about institutional opposition to a proposal that would allow Crown's board to issue more than 87 million convertible preference shares (CPSs) to real estate investor Hudson Conway as part of a restructuring plan.

CPSs are corporate securities originally sold with high income and little or no A voting rights but which later convert into common shares. With higher income levels than common stock and greater potential yield than corporate bonds, these shares often get snapped up quickly. Boards of directors around the world are increasingly enamored of them. And why not? A flexible means of raising quick capital can be a boon. However, existing shareholders often are less than thrilled with CPSs. And here's a heads up: As shareholder groups become more active in global markets, corporate boards will encounter greater shareholder resistance, because CPSs are often not as benign as they seem.

Crown's CPSs would have converted into ordinary shares at 95% of market value, which would have helped protect Hudson Conway from the company's slipping share price at the expense of existing shareholders. By late November, Crown shares had plunged to A$0.92 (US$0.69) from A$2.70 a year earlier. If the share price falls to A$0.50, the lowest conversion price allowed by the agreement, Crown will be required to issue 610.5 million new common shares to cover the CPS conversion. That would increase Conway's stake from 38% to more than 60% of the company. Shareholders argued that Crown essentially proposed to give up a controlling interest at a 5% discount.

While the fondness for CPSs is swelling in boardrooms across the world, amendments granting boards authority to issue CPSs are particularly gaining favor at Australian companies. …

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