Golden Shares: Meaning and Usage

Company expansion, market entry, privatization, and development can bring certain challenges in addition to advantages. Sometimes governments and companies do not want to give ordinary shareholders leverage, and that is when golden shares come into play. A golden share is a special type of share that grants its holder extraordinary rights – such as veto power – that exceed those normally associated with share ownership. Today, Icon.Partners will reveal the answer to the question: what are golden shares?

What Are Golden Shares?

Golden share definition and meaning

Firstly, a golden share is a privileged share that gives the holder special management rights. This does not always refer to financial advantages; often, golden shares grant the right to veto decisions made by management or shareholders. 

Origin of golden shares in corporate law

The idea of golden shares originated in Great Britain in the last century. Due to changes in economic approaches, the state privatized state-owned enterprises. To maintain control over strategically important enterprises, the authorities retained special shares that gave them the right to block decisions. This became the first golden share example. The idea then spread throughout the EU and the rest of the world and also gained popularity in corporate law. 

Purpose of golden shares in business

As we can see from the golden share definition, the main task is to retain control while holding some shares. Holders of golden shares can veto decisions to sell assets, prevent mergers or changes in ownership structure, etc. Businesses use golden shares to retain control over key investors and maintain balance with shareholders. 

How Golden Shares Work

Rights attached to golden shares

The main right associated with golden shares is the ability to influence key decisions. This means that a majority of votes is not required in order to influence key decisions. As we have seen before, this right is most often exercised by states to influence strategic companies. 

Veto power and government involvement

And let's not forget the main golden share meaning — the right of veto. This gives a strategic investor the ability to stop decisions that are threatening to the company or business. This tool is often used by governments to control privatized companies in order to avoid losing control and prevent potential risks to national interests. 

Golden shares vs ordinary shares

It is important to understand that golden shares are more of a concept, a right to block decisions in certain cases, etc. Ordinary shares are securities that generate income for the holder and grant voting rights. In a classic scenario, a significant number of shares determines the degree of influence in the company, but golden shares are an exception to this rule. 

Examples of Golden Shares in Business

Golden share example in privatized companies

Having clarified what is a golden share, let's look at an example. The government owns a company that manufactures strategically important engines used in military equipment. By transferring the company to private ownership, it can develop, the shares sold during privatization will bring additional revenue etc. However, the government does not want to lose such a company, so it creates golden shares that will allow it to block strategic decisions that could be harmful in the future. That's it!

Use in strategic industries

This is a fairly common practice that began in the last century. Many states have relieved themselves of the obligation to directly manage strategic enterprises, transferring them to private ownership. However, through golden shares, governments have retained a mechanism of influence over key sectors such as transportation, defense, and energy to prevent decisions that could harm national or public interests. 

Case studies from real businesses

British Aerospace is a striking example of the use of golden shares. The company was privatized during Margaret Thatcher's administration in order to stimulate competition and accelerate economic development. It should be noted that the process was not easy and required the adoption of separate laws and the development of major agreements to preserve the UK's influence, which was achieved through golden shares. 

Benefits and Drawbacks of Golden Shares

Advantages for governments and stakeholders

For the owner, whether it is the state or a shareholder, a golden share is a control tool. Even without a significant number of shares, key decisions and the ability to block them remain with the golden share. At the same time, it is important to maintain a balance so as not to alienate potential investors and interested parties. 

Potential risks and criticisms

The main point of criticism is excessive government interference in business. No company can be completely free, knowing that decisions can be vetoed by golden shares. At the same time, it should be remembered that golden shares are most often found in critically important companies, where it is important for the state to maintain key influence. 

Legal limitations and reforms

Golden shares are often discussed in the context of incompatibility with the principles of free movement of capital, as such mechanisms give owners excessive control and allow them to restrict private investment. Today, countries are reviewing golden share instruments or abandoning them altogether, limiting themselves to the use of special regulatory conditions that give investors more freedom. 

FAQ on Golden Shares

What is a golden share in business?

These are special rights that enable one to influence key decisions in the company without holding a majority of shares. 

What rights do golden shares provide?

The main right granted by golden shares is the right to veto key resolutions. 

Can private companies issue golden shares?

In general, yes, private companies can provide for the formation of golden shares in order to preserve the right of owners to influence key decisions when new investors are attracted. 

What is an example of a golden share?

Golden shares can be seen in the example of former state-owned companies that have been transferred to private owners. 

Why are golden shares controversial?

One of the main problems is that even with a majority of shares, the owner's decisions can be blocked.