Volume 25, Issue 1

Loyalty voting structures (LVS) are designed to provide registered shareholders with multiple voting rights following a specified holding period. In theory this concept strikes a balance between dual-class structures (DCS), which enshrine founder control, and open structures that allow for control challenges. LVS entail a single class of shares, enabling all shareholders to possess multiple votes without incurring additional costs, while also limiting the privilege through a transfer sunset provision. Notably, LVS also preserve a key control advantage of DCS for founders, as they minimize the likelihood of control challenges through contested board elections. However, in practice LVS distinguish between bearer shares that are fully fungible and registered shares that allow the company to verify the holding period. Institutional shareholders often find it impossible to register their shares, thereby being deprived of multiple voting rights. Consequently, LVS effectively function as a mechanism to enhance control akin to dual-class structures. Transforming loyalty voting structures into a better dual class for institutional shareholders would require some legal and significant procedural modifications.

The increasing use of dual-class voting structures in public companies—and the frequency with which such structures contain sunset provisions—raises the issue of when and how such sunset provisions should be modified, extending the company’s use of the dual-class structure. Recent decisions have applied the entire fairness legal standard to dual-class extensions, but, in the recent Trade Desk case, the Delaware Chancery court concluded that the extension complied with the MFW standard and should therefore receive the protection of the business judgment rule. We question the practicality of applying either entire fairness or MFW to dual-class extensions. Instead, we argue for a contractual approach in which the initial charter specifies the conditions under which a dual-class structure can be extended. The contractual approach increases the information available to shareholders at the IPO stage, thereby improving market efficiency. We argue that extensions that comply with such charter provisions should be insulated from entire fairness review.

Low-carbon innovation is necessary to overcome the delay of governments in implementing the Paris agreement. However, large institutional investors only engage in climate risk management. They cannot commit to low-carbon innovation because that is fundamentally uncertain, short-term unprofitable, and their index-tracking strategy is incompatible with screening firm-specific breakthroughs. To pursue sustainable corporate governance, institutional investors should rather tie their hands with controlling shareholders. Controlling shareholders can contribute their entrepreneurial vision to low-carbon innovation while institutional investors allow them to scale this vision. This article argues that institutional investors catering to the preferences of climate-conscious beneficiaries should finance controlling shareholders through conditional dual-class shares. Dual-class shares allow relaxing the financial conditions for control. To fulfil their mandate from climate-conscious beneficiaries, institutional investors can outcompete short-term profit-seeking investors by offering controlling shareholders a higher wedge between voting rights and economic interest and the possibility to cash in higher idiosyncratic private benefits of control, if successful, conditional on engaging in low-carbon innovation. Having at stake welfare-increasing private benefits of control, as well as all or most of their wealth, controlling shareholders are incentivized to discover low-carbon breakthroughs or to acknowledge failure to do so. Corporate law should facilitate contracting between controlling shareholders and institutional investors to support this incentive. Target-contingent transfer sunsets should allow cashing in control premiums only if the low-carbon innovation succeeds. Divestment sunsets and other contractual safeguards should prevent controlling shareholders from increasing agency cost, without undermining equity capital raising. Dual-class recapitalizations should be allowed with a majority-of-minority vote.

In December 2021, the Financial Conduct Authority (FCA) revised the Listing Rules applicable to companies listed on the London Stock Exchange’s (LSE) Main Market to permit the premium-tier listing of companies with specified weighted voting rights shares structures. The revision, broadly based upon the concept of “dual-class stock,” was premised on a desire to attract innovative, high-growth firms to the LSE. Founders would now be able to list their firms, sell equity and issue further shares for growth without fully relinquishing voting control. However, the FCA was clearly also concerned that an unconstrained dissociation between voting and cash flow rights could incentivize pernicious behavior on the part of founders. Accordingly, specified weighted voting rights shares structure embodies various conditions that restrain a founder’s ability to access the full gamut of advantages that dual-class stock can offer. As a result, specified weighted voting rights shares is more dual-class stock-lite rather than a fully-fledged premium-tier move toward multiple voting rights share structures. Less than two years later, the FCA appears prepared to revisit its approach to dual-class stock. Did the FCA get it wrong with dual-class stock-lite? In this article, each of the conditions attached to the use of specified weighted voting rights shares is scrutinized in the context of whether it appropriately balances the desire of founders for flexibility with public shareholder protection. If the intention was to encourage visionary founders to list their high-growth firms on the LSE, it is understandable that the FCA apparently now has buyer’s remorse.

Controlling shareholders have been directly involved in some of the largest and most consequential bribery scandals in the world over the course of the last decade. Nevertheless, the academic literature and the dominant international model of anticorruption law have neglected the dynamics and implications of controlling shareholder involvement in the payment of bribes. We argue that controlling shareholders, especially in family-controlled firms, may be uniquely positioned to lead corrupt schemes. We then analyze the incidence of this phenomenon in recent U.S. enforcement actions under the FCPA and in Brazilian enforcement actions under the Car Wash (Lava Jato) anticorruption operation. Controlled companies account for a minority of the FCPA cases, but for a large majority of the Brazilian cases. Controlling shareholders were implicated in a significant portion of actions against controlled companies in both contexts. We argue that the dominant international model, which is premised on organizational liability and incentives for compliance programs, is ill-suited to addressing cases of bribery led by controlling shareholders, and call for a distinct array of legal responses.

Corporate groups with listed subsidiaries are common around the world, despite the risks they pose to minority shareholders. Shaping a firm as a web of formally independent, minority-co-owned legal entities facilitates controllers’ diversion of corporate wealth (tunnelling) via intragroup transactions and other nontransactional techniques. This Article problematizes the conventional view of groups as tunnelling-facilitating infrastructures by arguing that organizing as a group with listed subsidiaries (a minority co-owned group) may create value for all shareholders. Organizing as a minority co-owned group may increase transparency, improve performance thanks to the possibility of using stock options for subsidiaries’ managers, allow for the circumvention of inefficient restrictions to dual-class shares, facilitate cross-border acquisitions, and be a second-best solution in the presence of path dependence issues preventing firms from moving from concentrated to dispersed ownership. If these are the economic rationales for having minority co-owned groups, how should the latter be regulated? In continental Europe special corporate law rules centred on a relaxation of directors’ fiduciary duties within minority co-owned groups, with a view to facilitating intragroup transactions, are increasingly popular among academics and policymakers. These rules, in turn, are bound to blur the separation between the minority co-owned listed entity as an independently managed firm and other members of the corporate group. However, because the rationales for minority co-owned groups presuppose the opposite, namely a clear and transparent separation between the minority co-owned listed entity and the group, our conclusion is that stringent self-dealing rules (or at least no less stringent rules than those established for conflicted transactions other than intragroup transactions) are required for minority co-owned groups to create value for all shareholders rather than merely facilitate tunnelling.

In this Article, I extend the analysis of controlling shareholders typically reflected in corporate governance scholarship—which is fundamentally framed in terms of shareholder wealth creation and diversion at the behest of the controller—to the increasing (geo)political significance of firms with controlling shareholders. This effort requires shifting the unit of analysis to the fusion of political-economic power inherent in corporate control and examining the implications of this fusion beyond the boundaries of the firm itself. I illustrate the approach by analyzing examples from a variety of new and old corporate capitalist systems operating globally today, and by surveying numerous policy domains in which firms with controlling shareholders are key protagonists: national security and economic sanctions, stock exchange competition, corporate influence on domestic political systems, and ESG. Expanding the lens through which controlling shareholders are viewed sheds light on their considerable influence in largely unexplored realms of wide-ranging geostrategic and political importance.

One of the most important developments underlying capital markets in recent years is the increase in the influence of activist minority shareholders. In a company without a controlling shareholder, dominant and activist shareholders, who hold only a low proportion of the company’s shares, can influence and even tip the scales in the decisions made and direct the company’s business. The legal system therefore imposes a fiduciary duty not only on controlling shareholders but also on those with effective control. Alongside the obligation, however, the absence of a clear and explicit definition of the concepts of effective power and effective control stands out. The Article empirically analyzes key court decisions litigated under Delaware law and finds that only two explanatory variables significantly explain court decisions in cases where the question of effective control arises. It therefore proposes a test for estimating shareholders’ effective power borrowed from the field of cooperative game theory. The test is based on the Shapley Value and Shapley and Shubik’s Power Index. The Article presents its application to decisions made at shareholders’ meetings to estimate the effective power of activist minority shareholders in various decisions. This test is simple to operate, objectively examines the situation based on the factual system that existed at the time the decision was made, and is not limited to specific ownership structures, particular markets, or current times. Adoption of the test is expected to increase the legal certainty regarding the imposition of duties on activist minority shareholders with effective control, thereby reducing the agency costs created as a result of the gap between their formal share in the corporation and their effective power.

Founder-CEOs may hold power in a corporation in myriad ways: through managerial control, by designating seats on the board, or by holding significant voting power, which can be amplified by dual-class structures with superior voting rights. The debate on control mechanisms such as dual- and multi-class stock structures, as well as concomitant concerns about the cult of founder-CEOs and their grip on managerial power, have been a central theme of corporate law and governance in an era of “founder-friendly” startup governance and tech company dominance of markets. Amid the twists and turns of this debate, we observe that a small but important point is missing: a substantial number of founder-CEOs have been ousted—forced or pushed to step down from the CEO role despite maintaining important indicia of control that, according to prevailing theory, empowers them to withstand such pressures. We argue that a variety of countervailing forces and factors can work to limit the durability of a founder-CEO’s power and may ultimately lead to their resignation under pressure even though they may hold significant or even controlling voting power. Among these forces are performance problems or poor financial position of the company or its stock value, legal concerns, employee and public pressure, as well as personal motivations and struggles. A founder-CEO who faces strong opposition and adverse effects on the company’s performance is often better off stepping down than attempting to maintain managerial control. Further, we explore the limits of these forces on powerful founder-CEOs—they can only do so much to serve as guardrails against voting control and they exist in a particular moment. Ousting can be temporary, and founder-CEOs can find their way back to the throne or see a rebirth in new ventures. Finally, we examine how an appreciation of these forces and their limits can shed new light on why public investors might be willing to accept multi-class structures in venture-backed startup IPOs.