Albert H. Choi is Albert C. BeVier Research Professor and Professor of Law at the University of Virginia Law School and Visiting Professor of Law at Columbia Law School. This post is based on a recent paper by Professor Choi.
Corporate ownership structure with a controlling shareholder is prevalent throughout the world. According to one study, more than two-thirds of all publicly-traded companies in East Asia have a controlling shareholder. Even in the US, not only do some of the largest public companies, such as Walmart, Ford, and Berkshire Hathaway, have controlling shareholders, concentrated ownership using dual class stock has become popular recently, as evidenced by the successful initial public offerings of companies, such as Google and Facebook. Corporate law and finance scholars have typically treated the presence of a controlling shareholder as the source of bad corporate governance and the result of bad corporate law. Controlling shareholders are known to abuse their power and extract “private benefits of control” at the expense of the minority shareholders. Examples include entering into conflicts-of-interest transactions, misusing corporate resources for personal ends, expropriating corporate opportunities, pursuing pet projects, and building a conglomerate empire. Not surprisingly, much of the existing scholarship espouses the goal of curbing the extraction of private benefits and protecting the minority shareholders. Particularly with respect to legal instruments that enhance a controller’s power, such as dual class stock, stock pyramids, and cross ownership, proposals have been made to ban them altogether or substantially limit their use.
