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Golden Shares: Principles and Alternatives

Golden Shares: Principles and Alternatives. Colin Mayer Sa ï d Business School University of Oxford. Differential Voting Rights. GS example of general class of differential voting rights, e.g. dual class shares

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Golden Shares: Principles and Alternatives

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  1. Golden Shares: Principles and Alternatives Colin Mayer Saïd Business School University of Oxford

  2. Differential Voting Rights • GS example of general class of differential voting rights, e.g. dual class shares • Associated with disproportionate control by particular shareholders, e.g. founding families • Create private benefits at expense of other shareholders

  3. Block Premia Austria 38% France 2% Germany 10% Italy 37% Spain 4% UK 1% US 1% Source: Dyck and Zingales (2004)

  4. Consequences • In absence of private benefits, one share-one vote is optimal • Private benefits may justify deviations • GS confers disproportionate control on the state • May therefore be justified by deviation of social from market benefits • Since free rider problem of market control, primarily impediment to market for corporate control • Is this impediment warranted?

  5. Bid Premia • Large gains to target shareholders in takeovers, in excess of 15% • Particularly so in hostile bids (30%) • Where do these come from - wealth transfers or efficiency gains? • Elimination of GS creates opportunities for large gains • Is this desirable?

  6. Takeover Restrictions • Yes - provided that there is not a social/ market divergence • Bid premia are prima facie but not sufficient evidence of benefits • Critical questions: • Do takeovers create social-market conflicts? • Why? • How large? • Are there better remedies than GS?

  7. Importance of Ownership • Ownership confers control rights • Significance in relation to investment and reinvestment decisions • Important where there is contract incompleteness • If possible to specify national objectives completely in, for example, regulatory contract then ownership is irrelevant • But if not then ownership matters

  8. Alternative Forms • State ownership • Partially privatized • Private firm with GS • Private regulated firm

  9. GS versus State Ownership • Large share blocks threaten minorities • Divergence of interests, particularly so when large shareholder is state • Discourages private investment and raises cost of capital • GS lessen this problem by restricting the rights of the state to intervene • Nevertheless, impede beneficial restructurings and undermine market integration

  10. Market Integration • Free flow of corporate control natural extension of free flow of capital • Should avoid impediments to international markets for corporate control • Analogous to takeover directive and break-through provisions • Important distinction – differential voting rights consistent with freedom of contracting, GS are not. Are there alternatives?

  11. Regulation • Can social-market divergences be corrected through regulation? • Can social obligations be specified in licences and contracts? • Can bonds and covenants be used to provide appropriate incentives and protection?

  12. Examples • BAA – GS governs changes in holdings of more than 15% and airport closure decisions • Spanish legislation regarding major corporate decisions, e.g. winding up, mergers and change in control of such companies as Endesa, Repsol and Telefonica • ECJ ruled against British government in relation to BAA and Spanish government in relation to Tabacelera and Argentaria

  13. Issue • Concerns relate to delivery of services to customers (quality, efficiency, price) • Can be specified in licences and regulatory contracts • But more legitimate concern in relation to new services - would rival airport owner seek to develop London or domestic base? • Where there is limited innovation, e.g. in water and electricity, regulatory contracts easy to specify but less so in e.g. telecoms

  14. Investor Protection • Efficient operation of market for corporate control requires regulation to protect investors as well as customers • In particular, market in corporate control requires takeover legislation to protect minorities

  15. Conclusions • GS debate should be considered in context of literature on ownership and control • Points to benefits of free market in control as well as capital • GS should only be justified on basis of clear public interest case and absence of alternative contractual remedies

  16. Conclusions • Implication is that GS should only be permitted in limited number of cases and sectors • Prohibition on state control does not however have implications for differential voting rights in private sector

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