2.2.2 Corporate Governance

Transparency of major shareholdings not only enables anticipation of agency costs, but can also play an active role in reducing such costs — thereby improving corporate govemance. There are two mechanisme through which ownership disclosure can do this. First, ownership disclosure can enable enforcement. In firms with concentrated ownership, disclosure of major shareholdings may expose a potential for trading on inside information or other forms of market abuse. More importantly, disclosure of the identity of the person who ultimately controls the firm makes it easier to detect diversion of corporate assets, for instance by exposing opportunities for tunneling.1 Transparency may also prevent blockholders from engaging in abusive behaviour in the first place, consistent with the notion that sunlight is the best disinfectant.2

In firms with dispersed ownership, ownership disclosure may facilitate the market for corporate control, the mechanism through which management is disciplined by takeovers and the threat of takeovers. Transparency of the target's ownership structure helps bidders to estimate the likelihood that their bid will succeed, and to identity parties who could be approached for irrevocable undertakings. Ownership disclosure also enables other potential bidders to mount a competing offer, by alerting them that a third party is building a stake in the target.

On the other hand, ownership disclosure may negatively affect the market for corporate control. Mandatory disclosure of stakebuilding can discourage the initial bidder from making a bid in the first place, because his potential profits from acquiring a toehold are reduced. Moreover, it functions as an early warring system to management of the target. This was originally one of the purposes of the UK ownership disclosure rules.3 To the extent management responds to the warring signal by taking defensive measures in order to protect its own interests, disclosure may negatively affect the market for corporate contro1.4 But to the extent management's response is aimed at strengthening its bargaining position so it can negotiate a higher offer price, the effects on the market for corporate control need not be negative. The same is true if management's response is aimed at gaining time, so it can solicit a superior bid by a third party.

The second mechanism through which ownership disclosure can reduce agency costs, albeit indirectly, is by enabling communication between the company and its shareholders, and among shareholders. Knowing fellow shareholders enables shareholders to exchange thoughts, to agree among themselves and to effectively assen their rights.5 But it may not always be easy to identify fellow shareholders.6 In many jurisdictions, shareholders will rely on ownership disclosure for this. Finally, in order for companies to effectively manage their investor relations, they need to have insight into their shareholder base.7 This was one of the reasons for the European Commission extending the scope of the European disclosure rules to holders of derivatives granting access to voting rights.8