Separation of cash-flow and control rights: Should it be prohibited?

According to the EU High Level Group of Company Law Experts (HLG), pyramidal groups, dual-class shares and other instruments used to deviate from proportionality between risk-bearing and control are a source of agency costs, in that they increase the private benefits of control and conflicts of interest and may therefore impose expense on the non-controlling shareholders. This HLG position is important since it may influence future EU regulation. The authors put forward four arguments. First, the concepts of ‘agency costs’ and ‘private benefits of control’, although partially overlapping, do not completely coincide, in that private benefits may not impose an expense on the non-controlling shareholders (ie private benefits may be either ‘good’ or ‘bad’). Secondly, while ‘bad’ private benefits may be associated with weak protection for minority shareholders, no clear-cut relationship has been found between private benefits and the ownership structure of firms; therefore a regulatory intervention on ownership structures is not necessary and may be harmful, both for existing shareholders and for society as a whole. Thirdly, pyramids, dual-class shares etc are mainly used to obtain a particular ownership structure, and are not associated with investor expropriation unless legal protection is weak. Fourthly, where ‘bad’ private benefits are high, national governments (and the EU) should not tinker with companies' ownership structure, but rather improve investor protection.