The Basic Governance Structure: Minority Shareholders
and Non-Shareholder Constituencies
The corporate governance system principally supports the interests of shareholders as a
class. Nevertheless, corporate law can also address the agency con icts jeopardizing the
interests of minority shareholder and non-shareholder contractual constituencies
To mitigate either the minority shareholder or the non-shareholder agency problems, a
governance regime must constrain the power of the shareholder majority and thereby
aggravate the managerial agency problem.
In this chapter, we rst address the protection of minority shareholders, and then turn to
governance arrangements that protect the rm’s employees
4.1 Protecting Minority Shareholders
Dominant shareholders enjoy “private bene ts of control”, a disproportionate
returns, often at the expense of minority shareholders
The varying degrees of protection accorded to minority shareholders by differing
corporate governance systems explain at least some of the variation in these indicators
4.1.1 Shareholder appointment rights and deviations from one-
share–one-vote
One way to protect minority shareholders is by granting them the right to appoint
one or more directors. Speci cally, company law can enhance minority appointment
rights by reserving board seats for minority shareholders or over-weighting minority
votes in the election of directors
The law can achieve a similar result on a broader scale by mandating cumulative or
proportional voting, which allow relatively large blocks of minority shares to elect one or
more directors
Signi cantly, however, general corporate law rules granting minority board
representation are relatively uncommon among our core jurisdictions
- Italy mandates board representation for minority shareholders in listed companies
- Brazil grants minority shareholders who hold more than a 10 or 15 percent stake (of
preferred or common stock, respectively) the right to appoint a board member, as well
as cumulative voting at the request of shareholders representing at least 10 percent of
voting capital
- In France, the UK, and the U.S. rms may adopt a cumulative voting rule, but publicly
traded rms rarely do so;
Page 1 of 12
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, - In Germany, commentators dispute whether cumulative voting is permissible at all in
public corporations.
- In UK, the new premium listing rules for companies with controlling shareholders
grant minority investors what may be called an “expressive” veto on the appointment
of independent directors
While the use of appointment rights directly to protect minorities is rare, all juris-
dictions regulate the apportionment of voting rights in relation to share ownership, a
central mechanism that affects both the appointment and decision rights of shareholders.
Corporate laws generally embrace a default rule that “Each share carries one vote”
All jurisdictions permit at least some deviations from the one-share–one-vote norm
to let dominant shareholders enhance their control over the corporation
- Germany and Brazil go furthest in limiting deviations from one-share–one-vote that
increase the power of controlling shareholders
- The U.S. goes furthest in banning or discouraging the use of pyramidal structures
through holding company regulations and the taxation of inter-corporate distributions
- Similarly, some European jurisdictions permit the issuance of so-called delity shares,
which condition the award of additional voting rights on a minimum holding period as
a shareholder
Exchange (NYSE, the New York Stock Exchange) listing rules banned deviations from
proportional voting for most of the twentieth century, dual-class shares have recently
enjoyed something of a renaissance in media and hi-tech corporations.
The U.S. has even attracted high pro le dual-class companies from abroad: for instance,
Chinese e-commerce giant Alibaba opted to go public on the NYSE after being
unable to list on the Hong Kong Stock Exchange, which still adheres to a strict one-
share–one-vote rule.
Much rarer than devices that empower a certain group of shareholders are legal
devices that simply dilute the voting power of large shareholders, to bene t small
shareholders. Perhaps the best known technique of this sort is “vote capping,” (A
limit on the percentage of the total vote that voters of a particular classi cation can
make.) that is, imposing a ceiling on the control rights of large shareholders and
correlatively in ating the voting power of small shareholders. For example, a
stipulation that no shareholder may cast more than 5 percent of the votes reallocates 75
percent of the control rights that a 20 percent shareholder would otherwise exercise to
shareholders with stakes of less than 5 percent.
Except for Germany and Japan, all our core jurisdictions permit publicly traded
corporations to opt into voting caps by charter provision
Page 2 of 12
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and Non-Shareholder Constituencies
The corporate governance system principally supports the interests of shareholders as a
class. Nevertheless, corporate law can also address the agency con icts jeopardizing the
interests of minority shareholder and non-shareholder contractual constituencies
To mitigate either the minority shareholder or the non-shareholder agency problems, a
governance regime must constrain the power of the shareholder majority and thereby
aggravate the managerial agency problem.
In this chapter, we rst address the protection of minority shareholders, and then turn to
governance arrangements that protect the rm’s employees
4.1 Protecting Minority Shareholders
Dominant shareholders enjoy “private bene ts of control”, a disproportionate
returns, often at the expense of minority shareholders
The varying degrees of protection accorded to minority shareholders by differing
corporate governance systems explain at least some of the variation in these indicators
4.1.1 Shareholder appointment rights and deviations from one-
share–one-vote
One way to protect minority shareholders is by granting them the right to appoint
one or more directors. Speci cally, company law can enhance minority appointment
rights by reserving board seats for minority shareholders or over-weighting minority
votes in the election of directors
The law can achieve a similar result on a broader scale by mandating cumulative or
proportional voting, which allow relatively large blocks of minority shares to elect one or
more directors
Signi cantly, however, general corporate law rules granting minority board
representation are relatively uncommon among our core jurisdictions
- Italy mandates board representation for minority shareholders in listed companies
- Brazil grants minority shareholders who hold more than a 10 or 15 percent stake (of
preferred or common stock, respectively) the right to appoint a board member, as well
as cumulative voting at the request of shareholders representing at least 10 percent of
voting capital
- In France, the UK, and the U.S. rms may adopt a cumulative voting rule, but publicly
traded rms rarely do so;
Page 1 of 12
fi fi .
.
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fi fi .
.
fl .
.
.
.
, - In Germany, commentators dispute whether cumulative voting is permissible at all in
public corporations.
- In UK, the new premium listing rules for companies with controlling shareholders
grant minority investors what may be called an “expressive” veto on the appointment
of independent directors
While the use of appointment rights directly to protect minorities is rare, all juris-
dictions regulate the apportionment of voting rights in relation to share ownership, a
central mechanism that affects both the appointment and decision rights of shareholders.
Corporate laws generally embrace a default rule that “Each share carries one vote”
All jurisdictions permit at least some deviations from the one-share–one-vote norm
to let dominant shareholders enhance their control over the corporation
- Germany and Brazil go furthest in limiting deviations from one-share–one-vote that
increase the power of controlling shareholders
- The U.S. goes furthest in banning or discouraging the use of pyramidal structures
through holding company regulations and the taxation of inter-corporate distributions
- Similarly, some European jurisdictions permit the issuance of so-called delity shares,
which condition the award of additional voting rights on a minimum holding period as
a shareholder
Exchange (NYSE, the New York Stock Exchange) listing rules banned deviations from
proportional voting for most of the twentieth century, dual-class shares have recently
enjoyed something of a renaissance in media and hi-tech corporations.
The U.S. has even attracted high pro le dual-class companies from abroad: for instance,
Chinese e-commerce giant Alibaba opted to go public on the NYSE after being
unable to list on the Hong Kong Stock Exchange, which still adheres to a strict one-
share–one-vote rule.
Much rarer than devices that empower a certain group of shareholders are legal
devices that simply dilute the voting power of large shareholders, to bene t small
shareholders. Perhaps the best known technique of this sort is “vote capping,” (A
limit on the percentage of the total vote that voters of a particular classi cation can
make.) that is, imposing a ceiling on the control rights of large shareholders and
correlatively in ating the voting power of small shareholders. For example, a
stipulation that no shareholder may cast more than 5 percent of the votes reallocates 75
percent of the control rights that a 20 percent shareholder would otherwise exercise to
shareholders with stakes of less than 5 percent.
Except for Germany and Japan, all our core jurisdictions permit publicly traded
corporations to opt into voting caps by charter provision
Page 2 of 12
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