High stakes: A scene from the Paramount-produced ‘Top Gun’ movie franchise. The firm’s total market value is around US$9bil. — Bloomberg
THE drama surrounding the future of Hollywood studio Paramount Global turns on one of the most fundamental questions in mergers and acquisitions (M&A): Should shareholders be treated equally in a takeover?
Indeed, this messy situation has become a case study in how ordinary investors in the United States may sometimes suffer in M&A because they lack the formal protections adopted by other major markets.
Paramount’s share capital is oddly divided between a small portion of voting stock and a large block of non-voting stock.
The company’s controlling shareholder, Shari Redstone, has been considering a sale of her majority holding in the voting shares.
These were worth nearly US$700mil at last Thursday’s close, out of the firm’s total market value of around US$9bil.
A consortium led by David Ellison, founder of Top Gun: Maverick producer Skydance Media LLC, has been trying to take the helm.
It made a controversial proposal to secure Redstone’s controlling holding and then merge Paramount with Skydance, with the latter valued at US$5bil.
The mooted price for the Redstone holding company that owns the stake (along with some movie theatres) is around US$2bil. That’s still a lot less than making an offer to buy all the voting and non-voting shares.
Cue an epic row.
The other stockholders are cross at the possibility of Redstone receiving a big cash payday while they would get a merger that’s hard to see generating a comparable premium.
Some would rather receive a clean takeover that paid out for everyone. Rival Sony Group Corp and buyout firm Apollo Global Management Inc have also made an approach, as has media mogul Byron Allen.
Redstone has tasked a subcommittee of the board with weighing it all up.
The general issue here is whether a controlling shareholder should be able to bag a takeover premium without sharing it among fellow investors.
The argument that such a transaction would be wrong goes roughly like this: While you invest in a company dominated by a controlling shareholder at your own risk, it very much matters to you who that controlling shareholder is.
You deserve the chance to sell at a decent price if the controller changes.
Paramount’s two share classes diverged on expectations of unequal treatment. Moreover, takeover premiums can be viewed as an asset belonging to all shareholders.
Investors with voting stock should therefore get the same price as the controller; any non-voting holders should get a clearly comparable top-up rather than a completely different transaction.
Hence most major markets outside the United States require bidders to make offers to all shareholders and not just one.
This so-called mandatory bid rule can kick in if a buyer acquires a holding large enough to confer effective control, said around 30% of the votes.
This protects ordinary investors from falling prey to a new controlling shareholder who may pursue a self-serving strategy.
Likewise in private equity, investments often include “tag-along” rights enabling minorities to exit alongside a lead shareholder. But in the United States, there’s no all-encompassing law forcing any sharing of proceeds.
There’s just a handful of exceptions. For example, a dominant shareholder couldn’t legally sell to a “looter” with foreseeable plans to abuse their power.
This isn’t going to be easy to prove.
The US view is essentially that the sale of a controlling stake is a contract between two willing parties.
Minority shareholders’ protection rests on litigating if they feel wronged. The typical grounds would be that board directors, or a controlling investor, had breached their fiduciary duties.
In academic circles, the US approach gets the more supportive hearing. The mandatory bid rule stands accused of impeding the efficient functioning of the market by thwarting bidders who can’t afford to buy the company whole.
This supposedly hinders control passing to new stewards who might run things better with, say, a 40% stake. Another criticism is that the mandatory bid rule wrongly harmonises the takeover price. The controlling shareholder may enjoy certain strategic benefits other shareholders don’t – justification for a price differential.
The snag here is we can’t see the putative transactions that should have happened but didn’t because the mandatory bid rule was a deterrent. Unable to prove a negative, we can’t be categorical on the matter.
The consensus is that neither strategy is better in all circumstances, but a strong case can be made that the US system creates more efficient outcomes overall, said Edmund Schuster, associate professor of corporate law at the London School of Economics.
“This comes at the expense of equal treatment and thus, some would say, fairness,” he said.
The academic critique of the rule may nevertheless be overly harsh.
Mandatory bids help competitive auctions get won by the bidder who can create most value, Schuster has argued.
Paramount is, of course, an exceptional situation due the lopsided mix of voting and non-voting shares.
But try telling its shareholders that their pain is the cost of investing in a market that’s theoretically more efficient than Europe’s.
The intensity of feeling here shows how much investors value a sense of fairness in M&A, regardless of what may be legally permissible and predictable.
That points to two consequences from all this.
Outside the United States, some experts have suggested companies should be able to opt out of the mandatory bid regime. Such arguments should find it harder to gain traction after Paramount.
It would be naive to suggest that US corporate law would or should adopt anything like the rules seen elsewhere.
But Paramount may influence how investors approach companies going public. The situation reinforces the idea that dual-class share structures should be time-limited.
Incoming investors could also do worse than push for tag-along rights to stay with the listed company. — Bloomberg
Chris Hughes is a Bloomberg Opinion columnist covering deals. The views expressed here are the writer’s own.
