Amidst spirited, sometimes emotional discourse, the nationally publicized competitive bidding surrounding acquisition of Banks Holdings Ltd. (BHL), brewer of Barbados’ iconic Banks Beer appeared to have reached a conclusion. Confirmation that Brazilian beer giant AmBev, through its St Lucian-based subsidiary SLU Beverages, acquired 6,054,354 BHL shares at BDS$7.10 per share on the floor of the Barbados Stock Exchange was communicated by CEO and board chairman G. Anthony King’s December 4 circular.
Purchase, the circular reports, took AmBev’s holdings beyond the controlling 50 per cent threshold. Yet, weeks later, controversy appeared unsettled as Banks DIH (BDIH), the Guyanese-based sister company, issued a public statement claiming sale of its 6.7 per cent shareholding
to SLU could not give AmBev control of the required 50 per cent of BHL’s issued shares. We shall return to significant implications of the BDIH statement.
Immediately, however, we make one thing clear. This controversy generating “bidding war” as it unfolded between AmBev and Trinidad’s ANSA McAL provides a teachable moment for understanding business development and economic growth, which Barbados and CSME states should carefully note as background to setting economic policy. It raises a range of complex important issues which cannot be discussed adequately in a 750-word column; so I try to do so in three parts.
They include the role and function of public limited liability companies, stock exchanges and financial intermediation, corporate governance and shareholder rights, duties and responsibilities of corporate boards and executives and last, but certainly not least, impacts of foreign investment on national development.
Corporate enterprise. Historically, created by legislation, the joint-stock company allowed stocks to be purchased by shareholders acquiring right of transfer either for consideration or as gifts, with no resultant direct impact on the existence or operations of the company. Across jurisdictions in capitalist “market” economies, modern corporate law recognizes such companies at incorporation –– the act that confers upon the entity a legal personality separate and distinct from that of shareholders.
This characteristic –– settled corporate law –– follows the landmark case Salomon v Salomon & Co Ltd (UK 1897). Additionally, a common feature of such companies is limited liability –– shareholders incur liability for company debt obligation to a value no greater than actual money invested.
Considered fictional, artificial, legal or moral rather than a “natural” persons, corporations legally mimic natural persons’ actions. They may borrow, effect contracts, raise money directly from the public, sue to obtain redress in disputes, and so forth. But owners, shareholders, are shielded from corporate losses, overhanging debt obligations.
These and other features of a public corporation create the possibility of securing greater financing through sale of stock. Shareholders benefit from a limit to their liability while simultaneously enjoying potential gains from share ownership limited only by the level of skill and effectiveness with which the corporation deploys and manages its productive resources.
There is thus a predisposition among asset holders to embrace share ownership. It becomes obvious that enterprises requiring investment finance much larger than might be available to a small but innovative corporation become feasible with enhanced access to financial capital.
Caribbean stock exchanges. With thoughts in the late 1940s and early 1950s of self-government and ultimately Independence from Britain, major economic problems for the post-war Commonwealth Caribbean were poverty and unemployment. Arthur Lewis advocated industrialization as a partial solution, seized of the critical role investment capital plays for plant, equipment and infrastructure. He proposed incentives to attract foreign capital, know-how, and so on.
Upon attainment of Independence creation of stock exchanges became a goal of economic policy. The reasoning was simple. An underdeveloped economy both lacks investible capital and provides limited choices among instruments of wealth holding. Apart from cash in safes or mattresses, savings accounts, land and other physical asset holding –– all dormant, inactive non-wealth-generating assets –– little else existed.
The range of financial instruments available, apart from those managed by a few established law firms investing client funds, was zilch.
As Jamaica, Trinidad and Tobago, Barbados and Guyana established stock exchanges the question was: which businesses would list? Transitioning from plantation-based export sugar production and attendant commerce funded mainly by bank overdraft, retained earnings and family wealth would not be easy.
After Independence, apart from international banks and insurance companies (don’t fault me for not mentioning Barbados Mutual and Jamaica Mutual plus building societies –– they’re for a much longer story), manufacturing subsidiaries of foreign firms and a few majors in oil and mineral extraction, local manufacturing, distribution and service firms were generally owned, operated and/or controlled by small groups of families. Indeed, early research by Barbadian business analyst Stanley Reid
on Jamaica’s Stock Market listed companies and their board membership control put the number at 21.
In such circumstances a generalized system in which a larger proportion of the population participates in ownership in the economy could not be achieved merely by creating stock exchanges.
Thus efforts were made to educate the public about the benefits of investment, money management and participation in the fledgling stock exchanges. Mind you, available funds in the hands of the public were minuscule and listed companies routinely offered a mere rump of their shareholding. Majority shares typically in excess of a range from 50 to 70 per cent of the stock remained in the hands of controlling groups.
Weaknesses of Caribbean stock exchanges. Money has been described as a “temporary abode of purchasing power”. Money supply, what macro and monetary economists refer to as M1 or M2, is the most liquid form of asset –– cash or near cash. Holding cash however, incurs costs: expensive safes and security guards, loss of potential interest income and inflation-linked value reduction. Stocks bear no such deficiencies; yet, though not providing liquidity equivalent to cash, they come close. They do so, however, only if the stock market in which they are traded is “broad, deep and resilient”. So what do we mean by this?
Optimally, investors purchase shares in the certain knowledge that they may sell whenever they wish at a market price that is fair, consistently and continuously knowable. This is defeated if trading is constrained.
The BHL deal typifies this problem. The immediately previously known BHL Stock Market value was BDS$2.50 per share. ANSA McAL’s CEO Nicholas Mouttet indicates when bidding commenced “. . . Banks shares were at $2.50. AmBev
is buying at $7.10 which is almost three times the market value at the time, thanks to our actions. The same thing occurred with BS&T (Barbados Shipping & Trading)”.
Fact is, everybody knew Banks shares were considerably undervalued. Absent continuous trading in the stock little or no relevant information feeds into market decision making hence stock price. Of Caribbean stock markets, Jamaica’s comes closest to –– though not yet achieving –– the characteristics described as “broad, deep and resilient”.
Yet Bloomberg on December 23 rated the Jamaica Stock Exchange (JSE) the world’s top-performing stock market for 2015. JSE rose more than 80 per cent during the year with 57 stocks traded. Barbados’ Stock Exchange lists less than half that of the companies on the JSE and trades much fewer hours per week. Caribbean stock markets are infants –– miniscule compared to say the NYSE. Their growth, credible regulatory oversight and evolving corporate law reform do, however, provide enhanced opportunities for economic growth in the region.
(Wilberne Persaud is an economist. Email [email protected])