Introduction
The term rump is used mostly in the context of a company’s merger or acquisition. A small group of investors who will go on to decline to tender their shareholdings at times of a corporate action, such as an acquisition or merger is referred to as a rump.
For instance, in the merger of Company X and Company Y, if enough shareholders of the company X do not agree to tender the shares that they hold, the new company may not be in a position to get access to the Company B’s cash flow. This may result in stalling or cancellation of the planned merger of the two companies.
Understanding Rump
The rump shareholders may be forced to sell the shares they hold without their permission by the underwriter. This is possible through the squeeze-out process, on the basis of the percentage of shares being owned by the majority. This is possible only if the shares are offered on the same terms and conditions as others.
For instance, the squeeze-out is permitted in the United Kingdom (UK) if more than 90% of the shareholders have their consent for the proposed action. This will force the rump shareholders to sell their shareholdings against their will.
Power of Rump
In order for a forced selling of the shares held by the rump, the majority must have the numbers as prescribed by the country’s securities market regulator (in India, it is the Securities and Exchange Board of India or SEBI).
Nevertheless, if the rump shareholders own enough number of shares, then have the power and legal rights to halt or stall the takeovers. Also, if the rump shareholders are unable to avoid a merger, then the share of the cash flow of the company can prove to be sufficient in discouraging the acquiring company from moving ahead with the planner acquisition or merger.
