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ABSTRACT
According to the EU High Level Group of Company Law Experts (HLC), pyramidal groups, dual-class shares and other instruments used to deviate from proportionality between risk-bearing and control are a source of agency costs, in that they increase the private benefits of control and conflicts of interest and may therefore impose expense on the non-controlling shareholders. This HLG position is important since it may influence future EU regulation. The authors put forward four arguments. First, the concepts of 'agency costs' and 'private benefits of control', although partially overlapping, do not completely coincide, in that private benefits may not impose an expense on the non-controlling shareholders (ie private benefits may be either 'good' or 'bad'). Secondly, while 'bad' private benefits may be associated with weak protection for minority shareholders, no clear-cut relationship has been found between private benefits and the ownership structure of firms; therefore a regulatory intervention on ownership structures is not necessary and may be harmful, both for existing shareholders and for society as a whole. Thirdly, pyramids, dual-class shares etc are mainly used to obtain a particular ownership structure, and are not associated with investor expropriation unless legal protection is weak. Fourthly, where 'bad' private benefits are high, national governments (and the EU) should not tinker with companies' ownership structure, but rather improve investor protection.
KEYWORDS: corporate governance, ownership, control, investor protection, pyramidal groups, agency theory
INTRODUCTION
The widespread use of dual-class shares, pyramidal groups and other instruments to separate cash flows from control rights is currently a hot topic in the corporate-governance debate. It is argued that these mechanisms could result in management and - maybe - control shareholders' entrenchment, impede the creation of a level playing field in the market for corporate control, and unduly hinder the restructuring of corporate Europe.
The High Level Group of Company Law Experts (HLG) appointed by the EU Commission has taken a negative position on these mechanisms, and has advocated a strict rule of proportionality between risk bearing and control.1 The HLG positively affirmed that deviations from one-share-one-vote are 'a source of agency costs in that they increase the private benefits of control and conflicts of interest, and therefore may come at an expense for the non-controlling shareholders'.2 Although the HLG Report...