Controlling Controlling-Minority Shareholders Corporate Governance and Leveraged Corporate Control

Abstract

The “one-share one-vote principle,” which states that a shareholder’s voting power is proportionate to his or her economic right, is one of the most fundamental rules in modern corporate law. However, in reality, controlling shareholders often obtain voting rights in excess of their economic rights through control-enhancing mechanisms, allowing them to leverage control over the firm. Empirical studies indicate that leveraged corporate control is prevalent among listed companies of various countries, yet, to date, many countries still disagree on a regulatory framework. The EU and OECD conducted studies concerning the regulatory policy over control-enhancing mechanisms several years ago. However, failing to reach a consensus, the reports only advised governments to enhance disclosure and transparency. In recent years, entrepreneurs hoping to maintain their control after public listing have sought to utilize dual-class share structures to leverage corporate control when going public. This led to recent reviews by the Hong Kong and Singapore stock exchanges—the Hong Kong Stock Exchange refused to grant listing with dual-class share structure, while the Singapore Stock Exchange approved the proposal to allow listing companies to have dual-class shares in order to maintain competitiveness. This recent development further exemplifies the complexities involved in regulating leveraged corporate control and the need to address relevant corporate governance concerns.

This Article reviews the inadequacy of past theoretical and empirical research on leveraged corporate control, and re-examines the issue of corporate governance from the contractarian view of corporate law. The Article differentiates between the IPO and post-IPO (or midstream) stages and argues that the contracting mechanism does not work well in the midstream stage. Controlling-minority shareholders usually set out various pro-insider provisions in IPO charters, which deters minority shareholders from repealing inefficient provisions or adopting other value-increasing provisions in the midstream. Furthermore, through an analysis Google and Facebook’s midstream issuance of non-voting Class C shares and the recent going-private transactions of U.S.-listed Chinese firms, this Article illustrates the opportunistic behaviors of leveraged corporate controllers through midstream charter amendments. Finally, this Article discusses potential governance strategies against pro-insider midstream distortions. Adhering to the “one-share one-vote” principle and prohibiting dual-class share structure would hinder the flexibility of corporate financing and affect economic development. This Article therefore argues against outright prohibition of control-enhancing mechanisms and advocates returning the governance decision to the hands of shareholders by empowering shareholders. In particular, the participation of institutional investors and shareholder activists is essential to counteract the superpower of controlling-minority shareholders and to govern their midstream opportunistic behaviors.