Control-Enhancing Mechanisms in Italian Companies

Abstract

Dual class systems, shareholder agreements and pyramid structures are legal devices whereby shareholders are able to separate voting rights from cash flow rights. These practices are used to strengthen the decision-making power of a small number of controlling shareholders to the potential detriment of many minority shareholders, whose vote becomes ineffective. In this way, controlling shareholders have the possibility of influencing or dictating corporate governance with the higher majority of voting rights that they obtain. These mechanisms are very different from each other and this paper demonstrates that regulatory changes, regarding the protection of shareholders which occurred in the Italian market from 1999 to 2007, have produced different effects on the mechanisms of separation between ownership and control, especially with regard to their diffusion among companies. In the same way, this work provides evidence that these mechanisms have the fact that they are more popular in larger companies in common, due to their higher needs of equity associated to the acquisition of control.Thus, the idea of this study is to analyze and measure the implementation of dual class systems, shareholder agreements and pyramid structures in Italian listed companies between 1999 and 2007.