When the Government Is the Controlling Shareholder

This post comes to us from Marcel Kahan, Professor of Law at New York University and Edward Rock, Professor of Business Law at the University of Pennsylvania.

In our paper When the Government Is the Controlling Shareholder, recently made publicly available on SSRN, we analyze the ways in which existing corporate law structures of accountability change when the government is the controlling shareholder, and the extent to which federal “public law” structures substitute for displaced state “private law” norms.

As a result of the 2008 bailouts, the United States Government is now the controlling shareholder in AIG, Citigroup, GM, GMAC, Fannie Mae and Freddie Mac. Corporate law provides a complex and comprehensive set of standards of conduct to protect noncontrolling shareholders from controlling shareholders who have goals other than maximizing firm value, but are designed with private parties in mind. We show that when the government is the controlling shareholder, the Delaware restrictions are largely displaced, but hardly replaced, by federal provisions. When GM goes public again, government ownership of a controlling position will be a significant “risk factor.”

Having concluded that the existing accountability structures do not provide sufficient protection of minority shareholder interests, we examine the variety of ways (in the U.S. and elsewhere) in which government ownership has been structured in order to minimize political interference at the expense of non-controlling shareholders, including nonvoting stock, independent directors, dedicated trusts, and separate management companies. None of these approaches offers robust protection of non-controlling shareholders.

Because neither ex ante legal structures nor ex post judicial review holds much promise for controlling political interference, we are left with a choice between developing new structures of accountability and bringing this anomalous era of government control to a speedy conclusion.

The full paper is available for download here.

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