summary chapter 4 Flashcards
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. Specifically, company law can enhance minority appointment rights by reserving board seats for minority shareholders or over-weighting minority votes in the election of directors. However, general corporate law rules granting minority board representation are relatively uncommon among our core jurisdictions.
While the use of appointment rights directly to protect minorities are rare, all jurisdictions 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 (one share one vote)
jurisdictions often contemplace adjustments to shareholder appointment and decision rights in both directions and permit at least some deviations from the one share one vote norm to let dominant shareholders enhance their control over the corporation. for the latter these mechanisms include
dual class equity structures with disparate voting rights
circular shareholdings
pyramidal ownership structures
much rarer than devices that empower a certian group of shareholders are legal devices that simply dilute the voting power of large shareholders, to benefit small shareholders. perhaps the best known technique of this sort is
vote capping: imposing a ceiling on the control rights of large shareholders and correlatively inflating the voting power of small shareholders
Minority shareholder decision rights
the law sometimes protects minority shareholders by enhancing their direct decision rights. Minority decision rights are strongest when the law entrusts individual shareholders (or a small minority of them) with the power to make a corporate decision. All core jurisdictions fortify minority decision rights over fundamental corporate decisions by imposing special majority or supermajority approval requirements
The incentive strategy (the trusteeship strategy and independent directors)
Lawmakers implicitly assume that independent directos will stand up to controlling shareholders in the interest of the enterprise as a whole, including its minority sahreholders and its non-shareholder constituencies. Strong forms of trusteeship reduce the possibility of controlling the board by shareholders.
However, a director qualifies as independent under such a definition even if she is vetted and approved by the companys controlling shareholder as long as she has no close family or financial ties with the controller. Moveover, the fact that in many jurisdictions shareholders have the right to remove (independent) directors at any time further exacerbates concerns about the lack of actual independence in controlled firms
the most modest and basic form of a director based trusteeship strategy
abandons all pretense to independence and simply requires board approval for important company decisions
The equal treatment norm
the equal treatment of shares (and shareholders) of the same class is a fundamental norm of corporate law. If it effectively blinds the controlling shareholder, it motivates her to act in the interests of shareholders as a class, which includes the interests of minority shareholders. Its functioning is subject to at least two important qualifications:
The first concerns the range of corporate decisions or shareholder actions that trigger this norm
The second concerns the meaning of the norm itself.
The core jurisdictions differ with respect to these qualifications of the equal treatment norm:
1) Civil law jurisdictions tend to view equal treatment as a broad principle (or source of law) that suffuses all aspects of corporate law
2) common law jurisdictions are less inclined to embrace a general legal standard of equal treatment as distinct from constraint like standards
The reach of teh equality norm varies greatly, both within and between jurisdictions. However, all jurisdictions rely on this device, in at least some circumstances, to align the incentives of controlling and minority shareholders
constraints and affiliation rights e
legal constraints are widely used to protect the interests of minority shareholders. In fact, these standards are often specific applications of the equal treatment norm, as when courts allow only “fair” transactions between companies and their controllers - meaning that controlling shareholders cannot accept unauthorized distributions from the corporate treasury at the expense of the firms minority shareholders.
The affiliation strategy, in teh guise of mandatory disclosure, is at least as important for protecting minority shareholders as it is for protecting shareholders as a class. Mandatory disclosure provides the information necessary to protect minority shareholders through various mechanisms.
The exit strategy goes only so far in protecting minority shareholders:
free transferability is helpful but incomplete as a minority protection tool. It permits dissatisfied minority shareholders to sell their shares on the market, but only if there is a market for the comanys shares, and at a price that already reflects the controlling shareholders abuses
Minority shareholders are generally unable to exit the firm by taking with them their proportional share of the corporations assets
Protecting employees
As contractual counterparties to the corporation, employees may deserve the protection of corporate law insofar as they are particularly susceptible to eploitation by the firm. From an economic perspective, this vulnerability emerges from the specific nature of the human capital investments that workers may make in their employers business. When these investments are firm specific (in the sense that they are useful only in the context of this employment), a profit-seeking corporation may subsequently exploit an employees lack of outside options to “hold up” the employee
The core jurisdictions differ profoundly in the extent to which they rely on corporate law for the protection of employees. Where the they do, appointment rights, decision rights, and incetives (and constraints) are the principal strategies of choice. Employees may also benefit indirectly from strategies designed to protect shareholders and creditors
Protection external constituencies
Precicely because they cannot protect themselves through contract, the corporations non contractual stakeholders have a greater need for legal protection than do its contractual constituencies. on occasion, regulators from our core jurisdictions resort to governance strategies and incentive st rategies, not (only) to mitigate agency problems within the firm, but (also) to achieve broader societal objectives
In recent years, there has been a rise in the use of “non-financial” or “social” disclosure requirements. These new obligations relate to information that, while arguable valuable from a social standpoint, may not always be relevant for shareholder affiliation decisions motivated soley by financial considerations. rather, their goal is to facilitate entry and exit decisions by shareholders (and consumers) on socially minded criteria and, where such decisions are taken on a sufficiently large scale, to shape substantive corporate conduct
The widespread use of the constraints strategy to protect the interests of external constituencies is usually thought to happen boyond the perimeter of corporate law. There are limited exceptions to this
other areas of law can harness the mechanisms and enforcement tools of corporate law to pursue their goals, which can make disciplinary boundaries more porous
The imposition on directors of duties to consider the interests of constituencies other than sahreholders. The corporate laws of many jurisdictions provide that directors owe their duty of loyalty to the ocmpany rather than to any of its constituenceis
Corporate law may idirectly protect non shareholder constituencies through the imposition of oversight liability on directors for failures to implement and onitor internal systems of compliance against illegal activity. By making it likelier that illegal activities will be detected and their effects contained, such oversight obligations can also protect external constituencies. Another (blunt) use of the constraints strategy of protect the interests of external constituencies is through the imposition of personal liability on directors and officers or even shareholders for violations of law
Explaining jurisdictional differences and similarities
The extent that private benefits of control measure the severity of the majority-minority shareholder agency problem, our core jurisdictions differed dramatically in the extent of protection that they offered to minority shareholders
These variations followed a clear pattern. The three jurisdictions in which large corporations ordinarily have dispersed ownership also had low private benefits of control, while the three countries in which concentrated ownership dominates had moderate to large private benefits. This association between dispersed ownership and low private benefits of control is not accidental. in fact, widely held firms can only thrive in contexts where private benefits of control are relatively small.
In contrast to the weak correlation between formal law and minorty shareholder protection, the correlation ebtween law and employee protection is strong. German company law does, in fact, reallocate corporate üower to unions and works councils through quasiparity codetermination and codecision rights. Codetermination may provide valuale insurance to skilled workers, protection them against layoffs due to external shocks in exchange for lower wages. Mutually wasteful bargaining behaviour such as strieks and lock-outs result in part from distrust between firms and employees. By credibly informing employees, labor directors might limit such costly bargaining behavior. The question remains: if large efficiencies result from codetermination, why do the parties fail to contract for labor directors voluntarily and divide the surplus? and explanation is that the costs of labor representation exceed its benefits, or at least are feared to do so.
Evaluating the correlation between formal law and the actual protection of non contracual constituencies is exceedingly difficult.
The interests of different stakeholders might conflict with one another, and measuring the impact of various strategies on overall social welfare is simply impossible. Moreover, the desirability of using corporate law to protect non-contractual constituencies hinges not only on its ability to protect stakeholders, but also on how it fares compared with regulation by other fields of law. As a result, any normative assessment of existing approaches to corporate law in different jurisdictions will be tentative at best
