Large Shareholders and Corporate Control

By: Andrei Shleifer and Robert Vishny

Part 1: Introduction

Overview

There exists a free rider problem with corporate monitoring

This problem can be corrected with a large shareholder model.

Three Important Questions

• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?

• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?

• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?

• Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up?

• How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm?

• Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?

Shareholder Structure

Fortune 500 sample reveals typical composition

Who are the largest shareholders?

Role of the large shareholder in takeovers

Part 2: Value of Large Shareholders

Cash Tender Offers

Cash Tender offers made to replace inefficient management

Simplified example

First Proposition

Impact of an increase in proportion of shares held by L

Larger shareholders are seen as more valuable

How does this impact small shareholders?

Second Proposition

Suppose there is an increase in legal costs

Williams Act of 1968

Other impact of takeovers facilitated by large shareholders

Part 3: Other Mechanisms for

Corporate Control

More Mechanisms

The actions of L can serve as a signal for small shareholders

Proxy Contests

The “Jawboning” Mechanism

Pretakeover Trading

Trades by L have an impact on price

L would prefer secret buying

The large shareholder is unlikely to sell.

Pretakeover Trading

A 13-D disclosure form is required

Problems could get worse by time of filing

Why do large shareholders exist?

Part 4: Dividends as Subsidy to large shareholders

What are tax implications?

Taxes mean different people will hold different valuations.

Small shareholders and large shareholders may support different payment forms.

Dividend Policies

Small shareholders may actually favor a dividend policy

Paying for monitoring is not permitted.

Conclusion and Questions