Justifications for Minority-Co-Owned Groups and Their Corporate Law Implications

Justifications for Minority-Co-Owned Groups and Their Corporate Law Implications

Luca Enriques, Sergio Gilotta

Series number :

Serial Number: 

Date posted :

March 23 2023

Last revised :

March 31 2023
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  • conglomerates • 
  • Corporate Governance Corporate Groups • 
  • corporate law • 
  • Pyramidal Groups • 
  • Related Party Transactions

Corporate groups with listed subsidiaries are common around the world, despite the risks they pose to minority shareholders. Shaping a firm as a web of formally independent, minority-co-owned legal entities facilitates controllers’ diversion of corporate wealth (tunnelling) via intragroup transactions and other non-transactional techniques.

This paper problematizes the conventional view of groups as tunnelling-facilitating infrastructures by arguing that organizing as a group with listed subsidiaries (a minority co-owned group) may create value for all shareholders. Organizing as a minority co-owned group may increase transparency, improve performance thanks to the possibility of using stock options for subsidiaries’ managers, allow for the circumvention of inefficient restrictions to dual class shares, facilitate cross-border acquisitions and be a second-best solution in the presence of path dependence issues preventing firms from moving from concentrated to dispersed ownership. If these are the economic rationales for having minority co-owned groups, how should they be regulated? An increasingly popular policy in continental Europe are special corporate law rules centred on a relaxation of directors’ fiduciary duties within minority co-owned groups, with a view to facilitating intra-group transactions. These, in turn, would blur the separation between the minority co-owned listed entity and other members of the corporate group as an independently managed firm. However, because the rationales for minority co-owned groups presuppose the opposite, namely a clear and transparent separation between the minority co-owned listed entity and the group, our conclusion is that stringent self-dealing rules (or at least to no less stringent rules than those established for other conflicted transactions) are required for minority co-owned groups to create value for all shareholders rather than merely facilitating tunnelling.

Published in

Published in: 
Theoretical Enquiries in Law journal (2024), Forthcoming