TOWARD RELATIVE CORPORATE GOVERNANCE REGIMES: RETHINKING CONCENTRATED OWNERSHIP STRUCTURE AROUND THE WORLD.

• Author: Anidjar, Leon Yehuda

INTRODUCTION 199 I. CONCENTRATED AND DIFFUSE OWNERSHIP STRUCTURE AROUND THE WORLD: THEORETICAL PERSPECTIVES 202 II. TOWARDS A TRANSFORMATION IN OWNERSHIP STRUCTURES AROUND THE WORLD 208 A. The Traditional Ownership Structure in Continental Law and the Reasons that May Contribute to Its Decline 208 1. The History and Development of the Traditional Ownership Structure Under Continental Law 208 2. Factors that May Lead the Decreasing of Concentrated Ownership Structure in Continental Law 211 B. The Traditional Ownership Structure in Anglo-American Law and the Factors that Are Likely to Decrease it 215 1. The History and Development of the Traditional Ownership Structure Under in Anglo-American Law 215 2. The Factors that May Lead to the Decreasing of the Diffuse Ownership Structure in Anglo-American Law 219 a. The Concentrated Ownership of Institutional Investors and Shareholder Activism 219 b. Dual-class Shares 220 C. Interim Summary 222 III. RETHINKING THE CONCENTRATED OWNERSHIP STRUCTURE IN THE CANADIAN AND ISRAELI ECONOMIES 223 A. The Characteristics of Concentrated Ownership Structure in Canada and Israel 223 1. Decrease in Holdings of Interested Parties 223 a. Canada 223 b. Israel 224 2. The Size of the Control Premium 226 3. Intensive Protection for the Rights of Minority Shareholders 228 a. Canada 228 b. Israel 230 B. Evaluation of the Findings 232 IV. TOWARD RELATIVE CORPORATE GOVERNANCE REGIMES 235 A. Presenting the Model 236 1. Ratio of Holdings Between the Controlling Shareholder and the Minority Shareholders 237 2. The Size of the Company 240 3. Area of Activity, Business Environment and Financial Stability of the Capital Market 241 B. Policy Considerations 244 1. Encouraging Cooperation Between Shareholders and Promoting Mutual Interests 244 2. Preventing Opportunism of Minority Shareholders 245 3. Rethinking the Traditional Role of the Company's Board of Directors 246 C. Implications of the Proposed Model 247 1. Re-examination of Related-Party Transactions 247 2. Going-Private Transactions 253 D. Criticism of the Relative Corporate Governance Model 257 1. Damage the Certainty and Stability of Corporate Law 257 2. Reducing the Protection of Minority Shareholders 258 3. The Model Is Insensitive to the Implications of Changes in the Company's Circumstances 259 CONCLUSION 260 INTRODUCTION

It is ordinary to distinguish between two types of ownership structures of publicly traded corporations in various countries around the world. In the "diffuse ownership structure" that exists in England and the United States, there is extensive dispersion of share capital in publicly traded corporations. (1) The widespread dispersal of equity and the rational indifference of shareholders results in shareholders ceding control and management in favor of a small group of managers who seek to promote their own personal interests at the expense of the interests of the shareholders. (2) For this reason, in recent years Anglo-American law has established new arrangements aimed at giving shareholders greater authority and power compared to the board of directors. The alternative structure--which exists in the rest of the world--is the "concentrated ownership structure," (3) which is characterized by a sharp divergence of interest between the controlling shareholder and the minority shareholders. Under this structure, the concern is that the controlling shareholder may pursue special interests that are at odds with the interests of minority shareholders. (4)

This article seeks to challenge the sharp distinction between the two ownership structures. A study of the economic and legal reality in Anglo-American law and Continental law points to a significant weakening of the traditional ownership structure in each of the legal systems. Thus, for example, in Continental law, there has been a significant decline in the use of concentrated control of banks and financial institutions of commercial corporations. For instance, the ownership structures of public companies in Germany have undergone significant changes in recent years, by reducing the extensive network of connections between financial institutions and these companies--known as "Deutschland AG"--and increasing the international variation in the identity of their shareholders. (5) For example, many European countries--such as Italy, (6) France, (7) Belgium (8) and Sweden (9)--have adopted "Say on Pay" arrangements which involve a mandatory vote on the compensation of the top executives of the company. These arrangements were adopted even though it was widely believed that controlling shareholders can control and monitor the compensation levels paid to company executives. The adoption of such arrangements of Anglo-American provenance in Continental law attests to declining concentration in Continental countries.

By the same token, in Anglo-American law there has been a significant rise in the holdings of institutional investors in the share capital of publicly traded corporations--such that most publicly traded corporations are now effectively controlled by sophisticated investors, such as pension funds, insurance companies, provident funds, and so forth. The amount of institutional ownership of U.S. public traded companies is extensive. It is estimated that institutional investors own about 70-80% of all stock in S&P 500 companies. (10)

As major institutional investors--such as BlackRock, Vanguard, State Street Advisors and Fidelity--have significant and large holdings in different firms across the United States, they employ mechanisms of supervision and control over the conduct of office holders in the corporation that are similar to those of controlling shareholders in a concentrated ownership structure. Therefore, the discrepancy between ownership and control--first noted by Berle and Means--may no longer characterize the American market. Currently, a small but significant percentage of publicly traded corporations in the United States use dual class shares, which strengthen the power of controlling shareholders to direct the company's activities and resolutions. (11) Moreover, between 2010 and 2017, the number of newly-public companies adopting dual-class share structures increased substantially. In 2010, just 12% of U.S. companies went public with dual class shares, yet in 2017, 18% of U.S. companies going public employed a dual-class share structure. Others suggest that although only 1% of US companies went public with dual class shares structures in 2005, close to 20% of US companies adopted such ownership structures as they went public in 2017. (12)

In this article I would like to discuss the normative implications of the weakening of the traditional ownership structure in countries with a concentrated ownership structure. I argue that the corporate governance rules in those legal systems are outdated because the sharp distinction between the diffuse and concentrated ownership structures no longer characterizes the exact reality of the Anglo-American and Civil legal systems. Therefore, I would like to redraw the rules of corporate governance that regulate the balance of power between controlling shareholders and minority shareholders through an innovative model that I call Relative Corporate Governance Regimes. According to this model, in view of the emergence of clearly diffuse characteristics in concentrated markets, the rules of corporate governance in relation to the protection of minority shareholders should be designed so as to reflect the following criteria: the ratio of holdings between the controlling shareholder and the minority shareholders; the size and scope of the company's activity; the type of activity that the company is engaged in; and its ramifications for the market's overall financial stability. (13) For many years now, lawmakers, courts and jurists have been debating the question of how to protect the rights of minority shareholders in transactions involving controlling shareholders such as "related party" and "going-private" transactions. Within this framework, I will show how this model contributes to the choice between protecting the rights of minority shareholders through a property rule versus through a liability rule. (14) This article is divided into the following sections. In Section I, I lay out the theoretical foundation regarding the traditional distinction between markets with a concentrated ownership structure and those with a diffuse one. The conclusion of this section is that there is no consensus in the economic literature as to which ownership structure is preferable, and therefore the legislator's task is to design rules of corporate governance that enable proper oversight of the individuals of authority in the public companies (be they controlling shareholders or directors) regardless of which structure is used. In Part II, I shall discuss the factors that led to the adoption of the traditional ownership structure in Continental (Germany, France and Italy) and Anglo-American law and examine various factors that might weaken the traditional ownership structure in the foreseeable future. Part III shows that the traditional ownership structures in Canada and Israel have similarly weakened due to legislative, judicial and institutional developments. In Part IV, I lay out the theoretical foundation for Relative Corporate Governance Regimes in corporations with a concentrated ownership structure and propose a model of what this looks like. I also discuss how this model may assist in regulating related party transactions with controlling shareholder and going-private transactions. Lastly, in this part, I will discuss various arguments against the model and refute them. I will then summarize my conclusions.

1. CONCENTRATED AND DIFFUSE OWNERSHIP STRUCTURE AROUND THE WORLD: THEORETICAL PERSPECTIVES

   In the late 1990s, economists began to conduct extensive comparative examinations of the control structures of publicly...