October 19, 2005
A lot of bantering has gone on this past year about increasing shareholder democracy, especially with respect to the election of directors (shareholder access to the ballot, majority voting for election of directors). Obviously, this bantering presupposes that shareholder democracy should be increased. What has struck me is that does not seem to be the message coming from the marketplace. There are many publicly traded "totalitarian regimes" out there, i.e., public companies that are controlled by one or a few shareholders. Google is perhaps the best known example. Others include Viacom, Refco, and WebMD. Viacom’s recently announced planned split into two companies provides a good example of shareholder disempowerment. Although it involves a fundamental change to Viacom, no vote of the public shareholders will be sought or is required to approve it. Since Sumner Redstone controls a majority of voting power, only his consent is necessary.
One may assume that the price of publicly traded shares of
controlled companies reflect a lack of control discount. Empirical studies on
price differentials of companies with dual classes of stock, however, do not
necessarily support this. Obviously, Google’s stock price has faired very well,
and WebMD and Refco both recently completed successful IPOs. We know what
happened to Refco, but would the stock of Viacom, Google and WebMD be trading
even higher if they were not controlled companies? Perhaps, but we don’t know.
This raises a much larger debate among corporate law scholars, in particular, Professor Bebchuk who advocates increased shareholder power and Professor Bainbridge who advocates director primacy.
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