Chapter 4 Flashcards
(21 cards)
Protecting minority shareholders
Since dominant sh enjoy private benefits of control = disproportionate returns
You grant minority sh the right to appoint directors (by reserving seats for minority shareholders or by weighting minority votes in election of directors - gives them access to infos & allow coalition w independent directors)
Sh agreements or chapter provision x special rights for minority
Corporate law: cumulative voting (put all ur votes on less candidates), proportional voting (even if seats are proportional to shares, minorities still have some board seats), minority elected directors get important roles, minority veto for important decisions
Cases of minority protection
Italy: board representation for all listed companies
Brazil: appoint board members if more than 15%, cumulative vote on request if 10% but coordination costs x dispersed ownership
Japan: cumulative voting is default but avoided by charter provisions
France, us and uk: cumulative voting adoptable but rare
Germany: not even sure ab c7mulative voting
General voting rule
In general: proportional voting rights to the share (1 to 1 proportion) hence econ exposure aligns w control, at risk of minorities being vulnerable too trolling shareholders
Deviations possible: dual class equity structure w disparate voting rights
Circular shareholding
Pyramidal ownership structure
Germany nd Brazil: no share w multiple votes
cases for pyramid, circular and dual class equity structure
germany and brazil: no multiple votes ahsare (1 share 1 vote), limit on non voting sharees (shares thta give u economic advantages bt no voting rights) & no restriction over pyramidal structures
us: ban of pyramdal structurees via taxation or company regulations
tenure voting system
you get more voting rights based on your time spent as a shareholder
italy: x2 after 2 years
france same as italy for defult
(lt sh oveer st sh)
us e uk: different classes of shares
dilution power of big sh
vote capping: eiling on control right of lare sh (basically inflates power of small shareholders)
except germany and japan: all other countries allow opt in of capping vote as default
minority decision rghts
idrect decision rights: entrust a individual sh w power to make a corporate decision
or requite special majority or supermajrity in the class that is being influenced (ex mergers)
eu: ppl w a sufficient percentage of minority shares are given a sttautory blocking right (25% or more)
us and brazil: supermajority needed
incentive strategy: trusteeship and equal treatment
trusteeship: independent directors on board or key board committees -
equal treatment norms to make sure all sh are treated equally (in both voting and distribution rights)
trusteeship x independent directors
mitigates sh manager prob, protects minority and protects non sh constituencies (employees, creditors, suppliers, customers etc) since theyrepowered by low power incentives will make the interest of corporation and check on sh
realty cjheck: not self appointing, not screened on indpendence by investors (at best no familiar or financial dependence from controlling shareholders)
+removal rights affect independence & directors face different reponsibilities incentives and potential liabilities x controlling sh
most likely requre board approval to make decisions
us and itaky: proposalds only x bod
germany: sh banned from making directly any decison x business w/ board invitation
equal treaatment norm
rule based constraint on sh
+incentive tstrategy: u should act in interest of the shareholder class, incl minority
germany, france, italy: equaal treatment applies everywhere
german and japan: general statutoy provision (written law that applies generaly to most cases)
uk and us: narrowed down to specific contexts
constraints and affiliation rights
to rpotect minorities: duty of loyalty (directors and managers aring more ab firms interest than their own), oppression standard (fair treatment of minorities=ì) and abuse of majoriy voting (they use their majority to exploit minorities and get benefits)
+ afilliation strategy= disclosure controlling sh, conflicted transactions, market prie x pportunism of contorlling sh, enough infos for minorty to protect themselves in voting and litigation
exit strategy
minority sh can sell if there is a markt for them
market price reflects abuses of majority sh
protecting employees
if supsceptible to exploitation by corporation
if laor law regulations are insufficient or more costly to protect workers
most common strategies to rptect employes
appointment rights
decison rights
incentives
+indirect benefit from protection of shareholders and creditors (mandato disclosue)
appointment and decision rights
many eu: mandate appoted employees directors in large companies
us,uk,japan,iyaly: do not mandate but boardparticipation
france: employees representation if more than 3% od shares
in larger companie one or two dircetors s employee representatives and in most companies (50+ indivoduals) : 2 sometimes 4 non voting representatives in board meets
germany: quasi prity detrmination - helf suervisionary hoard x employees, w some being labor nominees
chairman x sh (after 2 times not able to decide, his vote decides) +employees representatives veto to management board
work council
exc germany, never direct decision making right x workers
germany: work councils odecide w management ab employee sensitive matter
eu: employee information and consultaton but no deciison
incentives and constraint
incentives les important that w minority
trusteeship: independent directors weak on behalf of employees )excdelaware where they are permitted to take in consideration the interest of employees)
EQUAL SHARINNG ROOM:benefits (like profits or control) are shared equally or fairly among stakeholders, especially employees and shareholders. but no direct benefits to employees. might receivesome stocks but remain a minority + they get vulnerable if te firm does badly=
protecting external constitutncies
not main aim of corporate law but of other laws, but in contract law not only shareholders and employees atre involvet: corporates have a major ffect also on what surrounds them
ex of volgswagn pollution scandal
the greaterthe corporation the greate the impact and, by having only limited liabiltes, most likely won’t cover the costs, hence thre is a need for greater legal protection of third parties (not corporate law=
affiliation strategies
yu give them infos to understan dwhetehr its convenient to stay affiliated
hence disclosure that is not merel financial but on social values (not necessarily relevant for hsareholders in fact=
us: dodd frank act 2010
disclose use of conflict material w congo republic to alleviate ehumanitarian crisis
eu: non financial infos innmanagement reports (policy and performance x environment, human irghts and anti coruption/bribery)
japan: very little disclosure on non financial infos
appointment and decision right
usually no one other than sh have appoitment rights (excet germany coddecision w employees)
Golden shares = special shares (often held by governments after privatization), that allow the government to:
Appoint board members
Veto some decisions
Protect national interests
+director qualification requirements (ita, ger, fra gender quota and apan voluntary)
incentives and constraints strategy
Corporate law normally protects external groups indirectly.
But two tools within corporate law do help a bit:
✅ Forcing directors to think about other groups.
✅ Forcing boards to create compliance systems (or face liability). - to avoid illegal or harmful activities
+personal liability for manager and dirctors in case of a law breach
