There are 4 types of distributions to shareholders that listed companies prefer today:
- The dividends – the classic way of distributing profits to shareholders,
- The return of capital – a practice similar with dividends, with minor differences related to taxation,
- Buybacks – a sophisticated practice criticized by some authorities and corporate governance advisors, and
- Share allocation – a way of distributing profits that has expanded rapidly, especially because of goof profits, combined with low liquidity in some companies.
We have discussed with several investors (institutional and individual investors) and we have summarized below their thoughts.
Dividends
Formalities:
- Shareholders’ approval in ordinary meeting
- No formalities for investors have a brokerage account
Costs for investors:
- The transfer of money in investor account (minor banking cost)
- The broker cost (if any)
Advantages:
· Investors receive dividends directly in their accounts on payment day, without any formality
· There is a withholding tax
Return of capital
Formalities:
- Shareholders’ approval in an extraordinary general meeting, with special condition of quorum and majority
- For a listed company the approval of the regulatory authority is mandatory, so the date of distribution has not certainty because it depends by an external approval
- No formalities for investors have a brokerage account
Costs for investors:
- The transfer of money in investor account (minor banking cost)
- The broker cost (depends on brokerage agreement)
Potential challenges:
- Taxation for such process may be challenging, depending on the legislation applied
- The listed company needs to pay more regulatory fees for regulatory approvals and registrations and in the end the cost is reflected in the profits
- There are regulatory restrictions for performing return of capital
Buybacks
Formalities:
- Shareholders’ approval in an extraordinary general meeting
- For tender offers, the regulatory approval is mandatory
- Investors need to subscribe if they want to participate
Costs for investors:
- Brokerage fees paid to the investor’s broker (in addition to the brokerage fees paid by the issuer). In fact the brokerage fees are doubled because they are paid by the company as buyer and by the shareholder ad seller.
Advantages:
- There is liquidity on the market, and this influences the price
- During a tender offer period the price on the market is close to the price offered for tender, and shareholders may use the opportunity to sell before the tender is closed
- The shareholders that decide to stay will have a higher percentage of the company after the offer is completed
- Shareholders that decide to sell benefit on a price higher than market price, even only for a percentage of their shares (depending on allocation ratio) – however, it is advisable to check the brokerage fees for such percentage
Potential challenges:
- The listed company needs to pay fees for regulatory approvals and stock exchange fees, for brokerage and advisory fees and in the end all cost are reflected in the profits
- If buyback takes place for share capital decrease, there will be a share cancellation. Treasury shares are cancelled and netted off against the share capital and other reserves. The negative equity reserve arising on the cancellation of shares acquired needs to be covered, and this process ‘eats’ from the profits of the company
- A less sophisticated individual shareholder (for instance shareholders that received shares from Romanian State during privatization process or compensation of confiscation victims) either is not informed on the process because is not used with technology, either finds the process very complicated and usually don’t subscribe
- A shareholder holding only few shares may pay more brokerage fees than the benefit that has from the difference of price between tender price and market price as brokers have minimum brokerage fees and the allocation may allow the investor to sell a limited number of shares
Share allocation
Formalities:
- Shareholders’ approval in an extraordinary general meeting, with special condition of quorum and majority
- No formalities for investors have a brokerage account
Costs for investors:
- the brokerage fees (if any)
Advantages:
· Investors receive shares directly in their broker accounts, without any formality
Potential challenges:
- The listed company needs to pay regulatory fees for regulatory approvals, for brokerage and advisory fees and in the end all cost are reflected in the profits
- Even if the shares are issued from profits, there is not a cash distribution and the market price of the shares is usually decreasing on the market after new shares are issued for share allocation
- A regulatory approval is needed and it may take longer than expected
The fact that there are so many ways to distribute value to shareholders is a good sign and more educative social events for investors, especially for individual investors are welcomed.