Business Plan for Nestle PDF

Preview

Summary

We have learned that there are two types of agency problems: agency problems betweenshareholders and management, and agency problems between shareholders and creditors. Aspecial phenomenon in China's corporate governance practice is the existence of a third type ofagency problem, namely, the agency ...

Description

We have learned that there are two types of agency problems: agency problems between shareholders and management, and agency problems between shareholders and creditors. A special phenomenon in China's corporate governance practice is the existence of a third type of agency problem, namely, the agency problem between major shareholders and minority shareholders. Major shareholders may sacrifice the interests of minority shareholders in order to maximize their own interests. Is the major shareholder an angel or a devil? Discussions about the "supporting hands" or "tunneling hands" of major shareholders have been hot topics in recent years. What is your opinion about this problem? Are there this type of agency problem in your country? What measures does a major shareholder usually take to support or tunnel a listed company? Can you give a brief explanation with a typical case.

Is the major shareholder an angel or a devil? A key agency problem that exists in any corporation is the struggle between the minority shareholders and the majority shareholders (the agents). This is a high occurrence issue in jurisdictions where the concentrated shareholding dominates. It is an evident fact that the majority shareholders have more control over the governance of the company and therefore it holds an advantageous position for the minority shareholders. This happens when controlling shareholders who usually own a substantial portion of a firm’s ownership make decisions that are not beneficial for minority shareholders who do not have enough power to affect the decisions with voting rights. In my opinion the majority share holder is a devil share holder when he does following things; Profit expropriation: Improper transfer pricing between affiliated companies (companies controlled by a common shareholding group) is perhaps the most common way to expropriate profits. Profit expropriation using of one’s powers or influence to take the company resources Tunneling of assets This is where the majority shareholder transfers a company’s assets to private owned firms or utilizes profits in such activities that benefit them at the expense of the minority shareholders. Improper dilution Dilution is when a company issues additional shares of stock; it can reduce the value of existing investors' shares and their proportional ownership of that company. Many existing shareholders don't view dilution in a very good light After all, by adding more shareholders into the pool; their ownership of the company is being cut down. That may lead shareholders to believe their value in the company is decreasing. In certain cases, those with a large chunk of stock who are the

majority shareholders often take advantage of shareholders that own a smaller portion of the company who are the minority shareholders. When the majority share holder wants to appoint close relative in key managerial position, the minority share holder feels that they have got less power in the company.

Discussions about the "supporting hands" or "tunneling hands" of major shareholders have been hot topics in recent years. What is your opinion about this problem? Tunneling is an unethical business practice in which majority shareholders transfer company’s assets to privately-owned firms or utilize profits in such activities that benefit them at the expense of minority shareholders. Such actions may include sale of assets at lower valuations to a firm owned by majority shareholders, dilutive share measures, excessive executive compensation and personal loan guarantees. The key feature of tunneling is that the stakeholders, who engage in the activity, usually comply with all of the relevant legal procedures for personal gains. Tunneling is a transfer of resources out of the company for the benefit of controlling shareholders. As to date, most of the studies undertaken on expropriation focus mainly on tunneling activities in countries with high levels of corporate governance and developed countries. Tunneling can occur in country with high and low levels of corporate governance. Therefore, our study focuses on the expropriation1 of non controlling shareholders through tunneling activity in countries with low levels of corporate governance and emerging economy. Are there this type of agency problem in your country? Yes, this type of agency problems is in my country Uganda. UGANDA Baati Ltd, a manufacturer of roofing sheets and steel bars was founded in 1964 and is majority owned by the Safal Investments–domiciled in Mauritius – and the trustees of the Chandaria Family. Four minority shareholders Mr Andrew Muhimbise, Margaret Kiwana, Anna Mwewulize and Jesse Ibanda are the minority shareholders with 17570, 2881, 5000 and 500 shares respectively. They accused their majority shareholders of dubious transfer pricing schemes and poor corporate governance. Uganda Baati had been making losses since 2012, depriving shareholders a dividend. After the financial year of 2011, the Safal Investments and Chandaria Family, through direct control over management wholly appointed and answerable to them, began to engage in extensive transfer pricing arrangements and mechanisms to extract value from the company in a manner calculated to increase and exaggerate expenses of the Uganda Baati company.

There excessive charges in management fees on Uganda Baati by a related company. Other allegations include the use of funds – Shs6.2 billion - from Uganda Baati to acquire Tororo Steel Works a company owned by the Safal Group through an offshore entity in Switzerland Beltano Financial Corporation led to a loss of Shs3.8 billion in the Tororo Branch between 2013 and 2014. Other transactions include loans to related companies and purchase of land at a much higher price. What measures does a major shareholder usually take to support or tunnel a listed company? Can you give a brief explanation with a typical case. Tunneling is broadly classified in three categories; Cash flow tunneling includes diversion of ongoing cash flow in favour of majority stakeholders. The examples include transfer pricing arrangements where the majority shareholder, or a company in which the controller has substantial stake, sells inputs to the company at a price above the prevailing market price or purchases the firm’s output at lower prices. It can also include unwarranted high cash compensation to top executives that is taking a loan from the company at a rate below the prevailing market price. Asset tunneling is further divided into asset tunneling in and asset tunneling out. Asset tunneling out involves transfer of long-term assets from the firm for less than market value. It includes underpriced asset sale to affiliated firms. Asset tunneling in, on the other hand, involves a company acquiring major assets of affiliated firms at a price more than its market value. Equity tunneling in this case, majority shareholders hike their stake in a firm at the expense of minority shareholders. Examples of equity tunneling include insider trading, dilutive offerings, loans to insiders and equity-based incentive/compensation that exceeds market standards. All the three tunneling categories differ from each other. Unlike cash flow tunneling, which impacts near-term cash flow of a firm, asset tunneling transfers have a permanent effect on the firm’s future cash-generating capacity. Equity tunneling changes the shareholding pattern but does not directly change the firm’s productive assets or cash flows.

The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. In corporate finance, the agency problemusually refers to a conflict of interest between a company's management and the company's stockholders. From what I understood is that first we need to discuss about

What measures does a major shareholder usually take to support or tunnel a listed company? Tunnel i ngi sapr ocessi nwhi c hmaj or i t ys har ehol der st r ans f ert hecompanyas s et st o pr i v at eownedfir Tunneling or tunnelling is financial fraud committed by "the transfer of assets and profits out of firms for the benefit of those who control them".[1] In legal terms, this is known as a fraudulent transfer. For example, a group of major shareholders or the management of a publicly traded company orders that company to sell off its assets to a second company at unreasonably low prices. The shareholders or management typically own the second company outright, and thus profit from the otherwise disastrous sale. Tunneling differs from outright theft because people who engage in tunneling generally comply with all of the relevant legal procedures; it is thus a subtler scheme than simply writing checks from a company to a private bank account. While people widely agree that tunneling is unethical, penalties for it vary widely; some states impose criminal sanctions, whereas other states provide either for civil suits only, or for no sanctions at all....