When Activists Meet Controlling Shareholders in the Shadow of the Law: A Case Study of Hong Kong

Abstract

Shareholder activism has changed corporate governance around the world in the past decade. Conventional wisdom holds that shareholder activism is only effective in firms with dispersed ownership; there has been much less discussion on whether and how activism would work in firms with controlling shareholders. This article fills this gap by investigating whether and how legal mechanisms influence strategy planning and activism outcomes based on hand-collected data regarding activists’ initiatives against firms with concentrated ownership in Hong Kong from 2003 to 2017. This article finds that cases using formal legal mechanisms appear to have had a higher success rate. Among the legal tools available, minority veto rights are the most popular mechanism used by activists in Hong Kong, and are quite effective in leveraging their position in controlled firms. Furthermore, the availability of legal remedies and the ownership level of controlling shareholders are factors that influence activists’ strategies. Most activist initiatives against controlled firms involve corporate governance disputes where activists can rely on legal protection to enhance their bargaining position. On the other hand, activists tend not to make their demands public, and they also avoid exercising legal rights when controlling shareholders control the majority of the shares.

Keywords: Shareholder Activism, Controlling Shareholder, Minority Veto Rights

JEL Classification: K20, K22