Golden Shares – The Pitfalls

Golden shares are shares in a private company which carry special rights, sometimes held by a government or other authority, which were originally designed as a safeguard.

They allow the holder to veto certain strategic decisions, such as takeovers or changes to strategic business operations. While the concept may appear sensible in certain scenarios, in practice, golden shares can create significant problems.

Investor Reluctance

One of the most significant drawbacks of golden shares is the potential effect on attracting external investment. This is because golden shares introduce uncertainty and even if a shareholder acquires a controlling interest, the golden share holder can override and veto key decisions. This perceived lack of control can reduce the attractiveness of the company to potential investors.

Operational Issues

Golden shares can muddy the lines between shareholder oversight and the freedom of the company to take its day-to-day decisions. Consequently, the directors may find themselves in a balancing act between satisfying commercial objectives and complying with the requirements and objectives of the holder of the golden share. This dual accountability can delay decision‑making and undermine the efficient operations of the company.

Legal Uncertainty

In the European Union, the use of golden shares has faced numerous legal challenges. For example, the European Court of Justice has ruled against a number of member states for using golden shares in ways that were argued to restrict the free movement of capital. Such rulings can force abrupt changes in governance structures with consequential instability for both the company and its other shareholders.

Potential Political Interference

In the context of government-held golden shares, they are intended to protect national interests, but they can also be misused for political ends. For example, governments may block transactions not because they threaten strategic assets, but because they may not serve political agendas. This issue can undermine market confidence and can make the company concerned less attractive to potential investors.

Suppressing Strategic Decision Making

Companies with golden shareholders may find it harder to adapt to rapidly evolving markets. For example, mergers or acquisitions that could improve the company’s overall strategic position might be blocked. Over time, this potential barrier can damage a company’s market position and competitiveness, especially in rapidly evolving market sectors such as AI for example.

Conclusion

Historically, golden shares were conceived as a tool for balancing privatisation and public interest, but their drawbacks can be substantial. In limited circumstances, there may still be a place for the use of golden shares in private companies, but such use should be approached with caution for the reasons outlined above.

How Can We Help?

The Corporate and Commercial team at Wilson Browne Solicitors is ideally placed to advise on all aspects of company shareholder structures, including in relation to the use of golden shares. For a confidential and no obligation initial discussion about how we may be able to help, please contact the Corporate and Commercial team at 0800 088 6004.