Controlling Firms Through the Majority Voting Rule

Abstract

Pyramids, cross-ownership, rings and other complex features inducing control tunnelling are frequent in the European and Asian industrial world. Based on the matrix methodology, this paper offers a model for measuring integrated ownership and threshold-based control, applicable to any group of interrelated firms. In line with the theory on pyramidal control, the model avoids the double counting problem and sets the full-control threshold at the conservative -but incontestable -majority level of 50% of the voting shares. Any lower threshold leads to potential inconsistencies and leaves unexplained the observed high level of ownership of many dominant shareholders. Furthermore, the models lead to ultimate shareholders' control ratios consistent with the majority voting rule. Finally, it is applied to the Frère Group, a large European pyramidal holding company known for mastering control leverages.

Power Indices and the Measurement of Control in Corporate Structures

“…This example clearly illustrates the distinction between ownership and control. • Still other authors rely on concentration measures related to the Herfindahl index (as in Gorton and Schmid [2000], for instance), or on measures of integrated ownership inspired from input-output methodology (see, e.g., Ellerman [1991], Chapelle and Szafarz [2005]). …”

The Banzhaf index in complete and incomplete shareholding structures: A new algorithm

“…The total voting share of the ultimate shareholder in the target firm is then the sum of the control shares associated with all relevant chains. Second, the matrix consolidation model, developed by Chapelle and Szafarz (2005), is based on a control threshold (typically 50%). Full control is allocated to any shareholder who reaches the voting right threshold.…”

Control consolidation with a threshold: an algorithm

“…are ownership modalities that contradict the one-share-one-vote rule and allow for concentrating 2 Most theoretical contributions set the control threshold at 50% of the voting rights (Hauswald and Hege, 2003;Earle et al, 2004;Chapelle and Szafarz, 2005), in particular in the context of controlling coalitions (Bennedsen and Wolfenzon, 2000). Contrastingly, the empirical literature often considers lower control thresholds -typically 20% of voting rights, even 10% in case of dispersed ownership -(La Porta et al, 1999;Claessens et al, 2000;Faccio and Lang, 2002).…”