Einde inhoudsopgave
The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/1.2.1.1
1.2.1.1 Transparency of the Voting Structure
mr. M.C. Schouten, datum 01-06-2012
- Datum
01-06-2012
- Auteur
mr. M.C. Schouten
- JCDI
JCDI:ADS599425:1
- Vakgebied(en)
Ondernemingsrecht / Rechtspersonenrecht
Voetnoten
Voetnoten
Transparency Directive, supra note 10, at 2.
See infra note 266 and accompanying text.
Sanford J. Grossman & Oliver D. Hart, Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation, 11 Bell J. Econ. 42 (1980).
Adolph A. Belle & Gardiner C. Means, The Modem Corporation and Private Property 112-16 (New York, Harcourt, Brace & World Inc. 1967); Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
See Anat R. Admati, Paul Pfleiderer & Josef Zechner, Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium, 102 J. Pol. Econ. 1103 (1994).
See, eg., Marc Goergen et al., Do UK Institutional Shareholders Monitor Their Investee Firms?, 8 J. CORP. LAW STUD. 3 (2008); Stephen J. Choi & Jill E. Fisch, On Beyond CaIPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance, 61 Vand. L. Rev. 315 (2008).
See Henry Hansmann & Reinier Kraakman, Agency Problems and Legal Strategies, in The Anatomy of Corporate Law: A Comparative and Functional Approach, Reinier Kraakman et al. 22 (Oxford University Press 2004).
Mike Burkart, Denis Gromb & Fausto Panunzi, Large Shareholders, Monitoring, and the Value of the Firm, 112 Q. J. Econ. 693 (1997).
See, e.g., Henrik Cronqvist & Rudiger Fahlenbrach, Large Shareholders and Corporate Policies, 22 Rev. Fin. Stud.3941 (2009).
Empirical studies suggest that the presence of multiple blockholders can sort different effects. See, e.g., Luc Laeven & Ross Levine, Complex Ownership Structures and Corporate Valuations, 21 Rev. Fin. Stud. 579 (2008) (finding that blockholders fight to form ruling coalitions so that they can extract private benefits); Benjamin Maury & Anete Pajuste, Multiple Large Shareholders and Firm Value, 29 J. Banking Fin. 1813 (2005) (finding that firm value increases when voting power is distributed more equally among blockholders).
See Ronald J. Gilson, Controlling Shareholders and Corporate Govemance: Complicating the Comparative Taxonomy, 119 Ham L. Rev. 1641, 1652 (2006); Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Govemance and Corporate Control, 155 U. Pa. L. Rev. 1021, 1049 (2007).
See Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U. Pa. L. Rev. 785 (2003) (discussing the 'controlling shareholder tradeoff').
This may explain why empirical studies into the relationship between types of ownership structure and firm value have produced mixed results; for an overview, see Steen Thomsen, Torben Pedersen & Hans Kurt Kvist, Blockholder Ownership: Effects on Firm Value in Market and Control Based Govemance Systems, 12 J. Corp. Fin. 246, 251 (2006).Some view the ownership structure of the firm as an endogenous outcome of a maximizing process. Harold Demsetz, The Structure of Ownership and the Theory of the Firm, 26 J. L. ECON. 375 (1983); Harold Demsetz & Belen Villalonga, Ownership Structure and Corporate Performance, 7 J. Corp. Fin. 209 (2001). However, recent tests seem to confirm the causal direction. See, e.g., Thomsen et al., supra note 33; John J. McConnell et al., Changes in Insider Ownership and Changes in the Market Value of the Firm, 14 J. Corp. Fin. 92 (2008); Stijn Claessens et al., Disentangling the Incentive and Entrenchment Effect of Large Shareholdings, 57 J. Fin. 2741, 2764 (2002). But see Rim Zaabar, Stock Price Response to Mandatory Disclosure of Ownership Changes: Evidente from France (2008), at 22 (fmding no support for a causal interpretation, but offering possible explanations), available at: http://ssm.com/abstract=1102763.
See Jensen & Meckling, supra note 24 at 313 (developing a model showing that when prospective minority shareholders realize that the manager's interests diverge from theirs, the price which they will pay for shares will reflect the monitoring costs and the effect of the divergente between the manager's interest and theirs); Henry Hu & Bernard Black, Equity and Debt Decoupling and Empty Voting H: Importante and Extensions, 156 U. Pa. L. Rev. 625, 684 (2008) (noting that 'ffirom an economic standpoint, share pricing will be more efficient if investors know what major investors are doing'); Donald C. Langevoort, Managing the 'Expectations Gap' in Investor Protection: the SEC and the Post-Enron Reform Agenda, 48 Va L. Rev. 1139, 1152 (2003) (noting that the two functions of issuer disclosure, improving market efficiency and addressing agency problems, are inseparable insofar as a valuation decision is impossible without an assessment of the risk that incumbent management will divert to itself the otherwise expected stream of earnings).
For the EU, see Directive 2003/71/EC, On the Prospectus to be Published when Securities are Offered to the Public or Admitted to Trading, Annex I, section VIII, 2003 O.J. (L 345) 64; Commission Regulation 809/2004, As Regards Information Contained in Prospectuses as well as the Format, Incorporation by Reference and Publication of such Prospectuses and Dissemination of Advertisements, Annex I, items 18.1-18.4, 2004 O.J. (L 149) 1.
Luigi Zingales, What Determines the Value of Corporate Votes?, 110 Q. J. Econ. 1048 (1995).
Id. at 1048.
GAF Corp. v. Milstein, 453 F.2d 709, 717 (2d Cir. 1971), cert. denied, 406 U.S. 910 (1972).
It would also enable evaluation of the possible effects of a tender offer. 111 Cong. Rec. 28,259 (1965) (remarks of Senator Williams). See also Hu & Black, supra note 34, at 684 (noting that '[f]rom an economic standpoint, share pricing will be more efficient if investors ... have advance notice of possible changes in control.'). But see Jonathan R. Macey & Jeffrey M. Netter, Regulation 13D and the Regulator), Process, 65 Wash. U.L.Q. 131, 144 (1987) (suggesting incumbent management may be the primary beneficiary) (for a discussion of public choice theory, see infra note 132 and accompanying text and infra note 252 and accompanying text).
See, e.g., W.H. Mikkelson & R.S. Ruback, An Empirical Analysis of the Interfirn Equity Investment Process, 44 J. Fin. Econ. 14, 523, 534, 535 (1985) (measuring the announcement effects of U.S. 13D filings in the period 1978-80 and documenting that acquisitions by parties who have disclosed that they consider an acquisition of the target result in a statistically significant abnormal return of 7.74%, with average two-day initial announcement prediction error).
Alon Brav et al., Hedge Fund Activism, Corporate Govemance, and Firn Performance, 63 J. Fin. 1729, 1755 (2006) (using a sample consisting of 1,059 hedge fund-target pairs for the period 2001-2006, the authors measure effects of Schedule 13D filings and document abnormal return of approx. 2.0% on the filing day and the following day; afterwards, the abnormal returns keep trending up to a total 7.2% in twenty days. The authors conclude that share prices adjust to a level reflecting the expected benefit of intervention, adjusted for the equilibrium probability that the fund continues with its activism and succeeds); April Klein & Emanuel Zur, Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors, 64 J. Fin. 187, 208 (2009) (finding statistically significant mean market-adjusted returns of 7.2% over the [-30, +30] window around filing and concluding that the market perceives substantial benefits upon leaming that a firm is targeted by a hedge fund activist). In practice, the line between share price revisions due to the prospect of a takeover and revisions due to the prospect of shareholder activism is somewhat blurry. Brav et al., at 1758, show that acquisitions by hedge funds that can be interpreted as a prelude to a sale of the target company yield the highest returns relative to other types of activism. These fmdings are consistent with an empirical study by Robin M. Greenwood & Michael Schor, Investor Activism and Takeovers, 92 J. Fin. Econ. 362 (2009).
Zaabar, supra note 33, at 18 (finding statistically significant abnormal returns of 2.33% during the [-1, +3] window around the disclosure).
According to the Transparency Directive, disclosure of major holdings should enable investors "to acquire or dispose of shares in full knowledge of changes in the voting structure."1 It is useful here to distinguish between the voting structure and changes in the voting structure.
a. The Voting Structure
The voting structure determines who controls the company, at least to a large extent.2 Information on the voting structure constitutes fundamental information, because future cash flows may vary depending on the allocation of control. One way to see how is by looking through the paradigm of agency theory. This shows that different control patterns entail different agency costs, as illustrated by the following classic example.
In firrns with dispersed ownership, no individual shareholder has a strong enough incentive to devote resources to ensure that management acts in the interest of the shareholder.3 Hence, control is in the hands of management. This implies a risk of managerial slacking, which is a source of agency costs.4 By contrast, in firrns with concentrated ownership the controlling shareholder has a strong incentive to monitor management, as do smaller blockholders.5 Of course, not all blockholders may find it worthwhile to engage in monitoring.6 But to the extent they do, they could reduce agency costs.
At the same time, blockholders could be a source of new agency costs, notably by extracting private benefits (e.g., tunneling).7 There is also a risk of overmonitoring, which may discourage management from showing initiative.8 In practice, the behavior of blockholders will largely depend on their type (e.g., private investor, institutional investor),9 on whether there are other blockholders10 and on the legal environment.11
If investors expect the costs resulting from the ownership structure of a particular firm to outweigh the benefits, they may discount the share.12 Conversely, if they expect the benefits to outweigh the costs, they may be willing to pay more. Because of this trade-off, the impact of the ownership structure is likely to be different for each firm.13 The function of ownership disclosure is to enable investors to make their own informed assessment as to how the ownership structure of a particular firm may impact the value of the share.14 This explains why securities laws typically require disclosure of the ownership structure in the prospectus.15
There is an additional way through which the ownership structure may impact the value of the share. While the key component of share prices is the discounted value of expected future cash flows, they should also consist of a second component: the value of the vote. This value is determined by the likelihood that the vote will be pivotal in a contest for control and the price it will yield in such case.16 In flrrns with highly concentrated ownership, the likelihood of a control contest will generally be small compared to flrrns with dispersed ownership. Thus, the ownership structure has an impact on the value of the share via its effects on the probability of a control contest.17
b. Changes in the Voting Structure
If information on corporate control is fundamental information, then so must be information on a potential shift in corporate control. Indeed, the rationale of the U.S. disclosure regime is "to alert the marketplace to every large, rapid aggregation or accumulation of securities, regardless of technique employed, which might represent a potential shift in corporate control."18 This information would enable corporations, their shareholders and potential investors to evaluate the pos sible effects of a change in substantial shareholdings.19
A potential shift in corporate control can impact the value of the share in any of the ways described earlier. The appearance of a potential buyer, for example a raider or a competitor, could signal an increased probability of a control contest. This increased probability should increase the value of the share, a prediction supported by empirical evidence.20 The appearance of an activist hedge fund could signal an increase in monitoring, which explains why empirical studies show abnormal returns around the disclosure of purchases by hedge funds.21
Conversely, the exit of a blockholder can signal a reduction in monitoring and adversely affect share value. This is illustrated by an empirical study of share price responses in France, which is characterized by family control of listed firms. The study finds negative abnormal returns following sales of substantial stakes and concludes that this result is consistent with the view that monitoring by a blockholder increases shareholder value.22 In sum, the market's response to the shift in control will depend on the past behavior of the exiting blockholder and the expected behavior of the incoming blockholder.