Business, Legal & Accounting Glossary
A coattail provision is a statutory provision that enables holders of non-voting or restricted voting shares to convert their holdings to superior voting shares in the event of a takeover offer.
Minority shareholders in a company with dual-class shares face grave risks when the company intends to change its capital structure. Minority shareholders’ ownership is further diluted as a result of the issuance of additional subordinate shares. Subordinated shares typically pay higher dividends and are more liquid. A coattail provision safeguards minority shareholders in the event of a takeover. However, this is not an absolute guarantee.
Coattail provision is derived from the term “coattail investment,” which refers to an investment strategy in which investors replicate the trades of well-known and historically successful investors.
Consolidating dual-class shares into a single voting class increases equity liquidity and lowers capital costs. A coattail provision enables holders of non-voting or restricted shares to participate on an equal footing with holders of superior voting shares in a formal bid. They have the same access to information as superior class shareholders. Thus, minority or non-voting shareholders can share the benefits of a takeover. If an offer is made for a specified percentage of the voting stock, it must be extended to all other shareholders as well. Similarly, minority shareholders must approve reorganisation and reclassification of common shares into restricted voting shares.
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This glossary post was last updated: 26th January, 2022 | 26 Views.