Separation between 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 therefore may come at an expense for the non-controlling shareholders. The HLG position is important since it may influence future EU regulation. We argue that: a) the concepts of “agency costs” and “private benefits of control”, though partially overlapping, do not coincide, in that private benefits may not come at an expense for the non-controlling shareholders (i.e. private benefits may be either “good” or “bad”); b) while “bad” private benefits may be associated with weak protection of minority shareholders, no clear-cut relationship has been found between private benefits and firm ownership structure; therefore, a regulatory intervention on ownership structures is not necessary and may be harmful, both for existing shareholders and for society as a whole; c) 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; d) where “bad” private benefits are high, the State (and the EU) should not tinker with companies’ ownership structure, but rather improve investor protection.