Divestopedia Explains Coattail ProvisionThe minority shareholders of a firm that has dual class shares are exposed to critical risks when the firm intends to change its capital structure. Ownership of minority shareholders gets further diluted as a result of the issuing of further subordinate shares. Subordinate shares pay higher dividends and are generally more liquid. A coattail provision protects minority shareholders in a takeover situation. However, it does not represent an absolute guarantee.
The term coattail provision comes from the term "coattail investment," which is an investment strategy in which investors mimic the trades of well-known and historically successful investors.
Unification of dual class shares into a single voting class enhances the liquidity of equity and also reduces the cost of capital. A coattail provision is a mechanism by which non-voting or restricted shares can participate in a formal bid on par with the holders of superior voting shares. They get access to the same information that is available to superior class shareholders. The minority or lesser voting shareholders are thus able to share the gains from a takeover. If an offer is made for some specified amount of majority holding, it must be extended to other shareholders also. Similarly, reorganization and reclassification of common shares into restricted voting shares also requires the approval of minority shareholders.
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