A Survey of Legal and Regulatory Trends
Edited by P. M. Vasudev and Susan Watson
Chapter 4: Revisiting corporate control-enhancing mechanisms
One-share/one-vote is the foundational principle of shareholder voting. In practice, some firms adopt control-enhancing mechanisms, such as multiple-voting shares, pyramid structures or cross-shareholding, to allow shareholders to obtain control in excess of the equity shares they own. Such mechanisms are common among global public companies. In the past decades, we have seen a trend towards granting the founders of influential high-tech firms, such as Google, Facebook and Alibaba, disproportional control rights through control-enhancing mechanisms. This chapter provides a human resources perspective to explain the boom of control-enhancing mechanisms in recent Initial Public Offerings (IPOs) and to rationalize the use of these mechanisms in modern business. Investor protection and corporate governance are clouded by the increasing use of these mechanisms by controllers to gain disproportional control. This chapter finds that the results of existing empirical studies somewhat support the entrenchment effect of disproportional control and calls for a review of regulatory policies towards control-enhancing mechanisms. This chapter proposes a new taxonomy for understanding disproportional control mechanisms based on the participation of outside shareholders and identifies different regulatory strategies to protect outside shareholders. For shareholder participative mechanisms, for example, multiple voting rights shares, this chapter proposes empowering outside shareholders by granting them commensurate voting power to vote out control-enhancing mechanisms after IPO or in specific change-of-control events. For non-participative mechanisms, for example, control through cross-shareholding, a ban is desirable in jurisdictions with weak investor protection regimes. Keywords: • Dual-class shares • Control-enhancing mechanisms • Shareholder democracy • Investor protection • Short termism • Human capital
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