This Article contributes to the long-standing and heated debate over dual- class companies by placing a spotlight on a significant set of dual-class companies whose structures raise especially severe governance concerns: those with controllers holding a small minority of the company’s equity capital. Such small- minority controllers dominate some of the country’s largest companies, and we show that their numbers can be expected to grow.
We begin by analyzing the perils of small-minority controllers, explaining how they generate considerable governance costs and risks and showing how these costs can be expected to escalate as the controller’s stake decreases. We then identify the mechanisms that enable such controllers to retain their power despite holding a small or even a tiny minority of the company’s equity capital. Based on a hand-collected analysis of governance documents of these companies, we present novel empirical evidence on the current incidence and potential growth of small- minority and tiny-minority controllers. Among other things, we show that governance arrangements at a substantial majority of dual-class companies enable the controller to reduce his equity stake to below 10% and still retain a lock on control, and a sizable fraction of such companies enable retaining control with less than a 5% stake.
Finally, we examine the considerable policy implications that arise from recognizing the perils of small-minority controllers. We first discuss disclosures necessary to make transparent to investors the extent to which arrangements enable controllers to reduce their stake without forgoing control. We then identify and examine measures that public officials or institutional investors could take to ensure that controllers maintain a minimum fraction of equity capital; to provide public investors with extra protections in the presence of small-minority controllers; or to screen midstream changes that can introduce or increase the costs of small-minority controllers.
Professor of Finance/FIRN director, Commonwealth Bank Chair in Finance
University of New South Wales
Assistant Professor of Finance,
Wharton Finance, University of Pennsylvania
William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance
Harvard Law School