The Perils of Small-Minority Controllers

Forthcoming, Georgetown Law Journal

55 Pages Posted: 23 Feb 2018 Last revised: 9 Apr 2018

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law; Harvard Law School, Program on Corporate Governance

Date Written: February 1, 2018

Abstract

This Article contributes to the long-standing and heated debate over dual-class companies by placing a spotlight on a significant set of dual-class companies whose structures raise especially severe governance concerns: those with controllers holding a small minority of the company’s equity capital. Such small-minority controllers dominate some of the country’s largest companies, and we show that their numbers can be expected to grow.

We begin by analyzing the perils of small-minority controllers, explaining how they generate considerable governance costs and risks and showing how these costs can be expected to escalate as the controller’s stake decreases. We then identify the mechanisms that enable such controllers to retain their power despite holding a small or even a tiny minority of the company’s equity capital. Based on a hand-collected analysis of governance documents of these companies, we present novel empirical evidence on the current incidence and potential growth of small-minority and tiny-minority controllers. Among other things, we show that governance arrangements at a substantial majority of dual-class companies enable the controller to reduce his equity stake to below 10% and still retain a lock on control, and a sizable fraction of such companies enable retaining control with less than a 5% stake.

Finally, we examine the considerable policy implications that arise from recognizing the perils of small-minority controllers. We first discuss disclosures necessary to make transparent to investors the extent to which arrangements enable controllers to reduce their stake without forgoing control. We then identify and examine measures that public officials or institutional investors could take to ensure that controllers maintain a minimum fraction of equity capital; to provide public investors with extra protections in the presence of small-minority controllers; or to screen midstream changes that can introduce or increase the costs of small-minority controllers.

Keywords: Corporate governance, agency problems, dual-class, controlling shareholders, small-minority controllers, tiny-minority controllers, wedge, nonvoting stock, IPO

JEL Classification: G32, G34, K22

Suggested Citation

Bebchuk, Lucian A. and Kastiel, Kobi, The Perils of Small-Minority Controllers (February 1, 2018). Forthcoming, Georgetown Law Journal. Available at SSRN: https://ssrn.com/abstract=3128375 or http://dx.doi.org/10.2139/ssrn.3128375

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Kobi Kastiel

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

HOME PAGE: http://www.law.tau.ac.il/Eng/?CategoryID=242&ArticleID=548

Harvard Law School, Program on Corporate Governance ( email )

1575 Massachusetts
Cambridge, MA 02138
United States

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