In Polish-language publications it is very difficult to find any information about the actions marked (tracking stocks). However, the creation of a new category of securities in the form of shares identified as an indirect form between shares and bonds would help to adapt public stock companies to market needs and face foreign competition.
Like most modern financial instruments, the shares marked have American pedigree. While the unreflective adaptation of US models is not desirable in the long term, some financial instruments from outside the Atlantic can positively influence the evolution of our law. Although it seems that in their homeland the shares marked with the golden age are already behind them, it is worth looking at this instrument and answering the question whether this kind of action would work just as well in the native realities.
Definition and history of actions marked
According to the definition in “Compendium of terms in the field of finance in Polish and English” by Robert Patterson, the shares are marked with nothing other than a series of shares of the parent company allowing to distinguish the profit achieved by a particular branch or subsidiary (in English they are also referred to as letter stock or targeted stock).
In order to better understand the essence of these actions, it is worth reaching for their genesis. The shares are marked by an invention born on the American stock market. one of the first companies that aired them were a telecommunications tycoon – Sprint Corporation.
In years 1994-1995 The company acquired a national-wide PCS network, so that it was able to launch a new product on the mobile telephony market. It should be borne in mind that during this period the mobile telephony industry developed very quickly and was very attractive to investors.
Sprint noticed this and decided to split his ordinary shares into two Tracking classes, listed under two symbols: FON and PCS. Thus, the classic fixed telephony business was assigned to the FON action and the mobile business to the PCS action. The shareholders received one PCS action on two FON shares they owned.
The essence of the shares identified is that the shareholders have shares in the parent company, but their entitlement to the dividend depends on the performance of a particular activity
After the introduction of PCS shares on the market, demand for them was amazing as speculators led to an increase in the price of shares linked to the mobile telephony department. While the stock price grew, purchasers paid less attention to balance sheets, profit and loss accounts and other indicators.
When the bubble broke and the growth did not match the sensible P/E index (price/profit ratio – the benchmark for assessing the attractiveness of stock stock) with a dividend split, Sprint's stock prices on the New York Stock Exchange and Nasdaq began to fall, along with the rest of the overestimated shares.
In April 2004, separately listed shares of PCS were absorbed by FON shares. This was contested in many lawsuits by PCS shareholders who believed that their shares had been devalued because they were listed in relation to 1 PCS shares to 1/2 FON action. PCS shareholders claimed that the loss was from 1,300,000,000 to 3,400,000,000 USD.
The above described history of Sprint's shares is a significant example of the use of the concept of marked shares, which became fashionable at the peak of stock listings in 1999 and 2000, when many companies were looking for ways to obtain a high valuation for internet related activities with a high price-to-profit ratio. Since then, the popularity of this solution has begun to decline.
Advantages and disadvantages of actions marked
The essence of the shares identified is that the shareholders have shares in the parent company, but their entitlement to the dividend depends on the performance of a particular activity. This in turn allows for a separate valuation of both series of shares on the stock market, according to the relevant price/profit ratios.
There are several benefits to such monitoring of resources. After first, The link between shares and a specific business segment allows the board to unlock the value of the company by increasing the total stock capitalisation and the value of the company, i.e. by increasing the overall price/profit ratio.
This makes existing shareholders richer because they can sell their shares at a higher price. This also gives the board a currency in the form of two the different types of shares that may be used for the investment. Another major benefit for the board is that it retains control of the tracked business segment or company.
The issue of shares is often a preliminary step towards divesting a subsidiary or creating a "buying currency" to make a specific purchase. At the same time, this situation allows the parent and subsidiary to enjoy common benefits, such as operational synergies, tax losses or credit assessments.
On the other hand, However, the pages, the shares marked have some drawbacks. The designation of shares often involves a significant restriction or even a lack of voting rights. The owner of the shares designated is also not the owner of a specific business segment which is linked to the shares designated.
For example, in the event of the company being declared bankrupt, creditors could satisfy themselves with all the assets of the company, including the assets of the branch related to the shares identified, even though the branch was extremely profitable and rapidly developed and, as such, would not qualify for bankruptcy.
This is not the case for traditional subsidiaries. An additional inconvenience is that the shares marked may be absorbed back into the pool of principal shares at a price that may seem unattractive to the owners of the designated shares, or to the owners of the principal shares, or to both groups of shareholders.
As we remember, this is what happened in the case of Sprint, and some investors have tried to prevent the reabsorbation of shares marked by court proceedings against the company.
The Polish Commercial Companies Code currently allows the company to issue several types of shares. According to Article 354(1) k.s.h. the statutes may grant personal rights to the individually designated shareholder.
In particular, they may concern the right to appoint or dismiss members of the board, supervisory board or the right to receive designated benefits from the company (e.g. a privileged dividend). In conclusion, we see that the American regime is extremely flexible in relation to the Polish regime.
When formulating de lege ferenda's demands for the creation of a new category of action, it should be noted that it was the flexibility of solutions that followed the success of this type of action.
If today it is proposed to replace different categories of shares with next generation shares, it is because they no longer meet the needs of issuers. The paradox is that despite the multitude of instruments introduced in the course of subsequent legislative reforms, issuers are complaining of the legislative shackles imposed on them.
Author
Justyna Kyć - Legal adviser in the Legal Department of 2017 associated with Russell Bedford Poland. He specializes in corporate customer service, in particular in drawing up and negotiating commercial contracts and providing ongoing legal advice.