When the Government is the Controlling Shareholder
New York University School of Law; European Corporate Governance Institute
Edward B. Rock
University of Pennsylvania Law School
Texas Law Review, Vol. 89, p. 1293, 2011
U of Penn, Inst for Law & Economics Research Paper No. 10-10
NYU Law and Economics Research Paper No. 10-20
As a result of the 2008 bailouts, the United States Government is now the controlling shareholder in AIG, Citigroup, GM, GMAC, Fannie Mae and Freddie Mac. Corporate law provides a complex and comprehensive set of standards of conduct to protect non-controlling shareholders from controlling shareholders who have goals other than maximizing firm value. In this article, we analyze the extent to which these existing corporate law structures of accountability apply when the government is the controlling shareholder, and the extent to which federal “public law” structures substitute for displaced state “private law” norms. We show that the Delaware restrictions on controlling shareholders are largely displaced, but hardly replaced, by federal provisions. Having concluded that the existing accountability structures do not provide sufficient protection of minority shareholder interests, we examine the variety of ways (in the U.S. and elsewhere) in which government ownership has been structured in order to minimize political interference at the expense of non-controlling shareholders, including nonvoting stock, independent directors, dedicated trusts, and separate management companies. Because neither ex ante legal structures nor ex post judicial review hold much promise for controlling political interference, we are left with a choice between developing new structures of accountability and bringing this anomalous era of government control to a speedy conclusion.
Number of Pages in PDF File: 72
Keywords: Governmental bailout, minority shareholders, firm value maximization, corporate purposes, displacement of regulatory structures with ownership influence, structuring government ownership to weaken political influence, governmental equity and control, government corporations
JEL Classification: G38, H19, H59, H81, K22, K29
Date posted: May 27, 2010 ; Last revised: May 15, 2011
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