Activist Shareholders at De Facto Controlled Companies

Brooklyn Journal of Corporate, Financial and Commercial Law, Forthcoming

Bocconi Legal Studies Research Paper No. 3270453

45 Pages Posted: 13 Nov 2018 Last revised: 1 Jan 2019

See all articles by Gaia Balp

Gaia Balp

Bocconi University - Department of Law; EUSFIL Jean Monnet Centre of Excellence

Date Written: October 11, 2018

Abstract

Activist campaigns are likely to increasingly target controlled companies. Studies concerning activism at controlled companies focus on shareholder-empowering tools, such as board representation rights, as a pathway for reducing majority-minority agency costs. However, no clear dividing line between de jure and de facto controlled companies is drawn when analyzing the potential corporate governance effects of successful activist intervention. Building on the recent Telecom Italia case, this Article analyzes the possible unexpected corporate-governance consequences of successful activist intervention at de facto controlled companies, showing that such a distinction is not a trivial one. Under certain conditions, the interplay of activism and de facto control predicts instability, or at least inefficiency, at the corporate governance level following successful activist intervention. Where board representation rights apply and the shareholder base includes a significant share of institutional investors, institutions’ teaming up with activists can bring about substantial changes in the governance structure of the form, typically at the board level, and terminate control, regardless of any change in corporate ownership and the voting rights. Reversing the ordinary balance of powers between minority and majority shareholders can bring about a situation characterized by both the disadvantages of not having a controller and those associated with contestable control. In such a situation, the monitoring role to be played by institutional shareholders is bound to be pivotal. This Article warns to potential corporate governance unexpected effects of activism at de facto controlled companies within a regulatory environment that ensures shareholder board representation, and complements the skeptical view about promoting shareholder engagement with a view to the risk of institutions’ inadequate monitoring.

Keywords: corporate governance, hedge funds, activism, institutional investors, shareholder empowerment, controlled companies, de facto control

Suggested Citation

Balp, Gaia, Activist Shareholders at De Facto Controlled Companies (October 11, 2018). Brooklyn Journal of Corporate, Financial and Commercial Law, Forthcoming, Bocconi Legal Studies Research Paper No. 3270453, Available at SSRN: https://ssrn.com/abstract=3270453

Gaia Balp (Contact Author)

Bocconi University - Department of Law ( email )

Via Roentgen, 1
Milan, Milan 20136
Italy

EUSFIL Jean Monnet Centre of Excellence ( email )

Italy

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