Justifications for Minority-Co-Owned Groups and Their Corporate Law Implications

European Corporate Governance Institute - Law Working Paper No. 693/2023

Theoretical Enquiries in Law journal (2024), Forthcoming

31 Pages Posted: 28 Mar 2023 Last revised: 29 Nov 2023

See all articles by Luca Enriques

Luca Enriques

Bocconi University - Bocconi Law Department; University of Oxford - Faculty of Law; European Corporate Governance Institute (ECGI)

Sergio Gilotta

University of Bologna - Department of Legal Studies

Date Written: March 20, 2023

Abstract

Corporate groups with listed subsidiaries are common around the world, despite the risks they pose to minority shareholders. Shaping a firm as a web of formally independent, minority-co-owned legal entities facilitates controllers’ diversion of corporate wealth (tunnelling) via intragroup transactions and other non-transactional techniques. This paper problematizes the conventional view of groups as tunnelling-facilitating infrastructures by arguing that organizing as a group with listed subsidiaries (a minority co-owned group) may create value for all shareholders. Organizing as a minority co-owned group may increase transparency, improve performance thanks to the possibility of using stock options for subsidiaries’ managers, allow for the circumvention of inefficient restrictions to dual class shares, facilitate cross-border acquisitions and be a second-best solution in the presence of path dependence issues preventing firms from moving from concentrated to dispersed ownership. If these are the economic rationales for having minority co-owned groups, how should they be regulated? An increasingly popular policy in continental Europe are special corporate law rules centred on a relaxation of directors’ fiduciary duties within minority co-owned groups, with a view to facilitating intra-group transactions. These, in turn, would blur the separation between the minority co-owned listed entity and other members of the corporate group as an independently managed firm. However, because the rationales for minority co-owned groups presuppose the opposite, namely a clear and transparent separation between the minority co-owned listed entity and the group, our conclusion is that stringent self-dealing rules (or at least to no less stringent rules than those established for other conflicted transactions) are required for minority co-owned groups to create value for all shareholders rather than merely facilitating tunnelling.

Keywords: Corporate Governance, Corporate Groups, Corporate Law, Pyramidal Groups, Related Party Transactions

JEL Classification: G3, G34, G38, K22

Suggested Citation

Enriques, Luca and Gilotta, Sergio, Justifications for Minority-Co-Owned Groups and Their Corporate Law Implications (March 20, 2023). European Corporate Governance Institute - Law Working Paper No. 693/2023, Theoretical Enquiries in Law journal (2024), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4397428

Luca Enriques (Contact Author)

Bocconi University - Bocconi Law Department ( email )

Via Roentgen 1
Milan, MI MI 20136
Italy

University of Oxford - Faculty of Law ( email )

St Cross Building
St Cross Road
Oxford, OX1 3UL
United Kingdom

European Corporate Governance Institute (ECGI)

Sergio Gilotta

University of Bologna - Department of Legal Studies ( email )

Via Zamboni 27/29
Bologna, 40126
Italy

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