Golden Share Research Articles

State ownership and control in the Czech Republic

We analyze the extent of the integrated control of the state over privatized firms during the post-privatization decade (1995–2005) in the Czech Republic. During this period the integrated control potential of the state resembled a corporate pyramid. While pyramidal control was not fully utilized, the golden share in the hands of the state substantially enhanced its ability to control firms. In terms of corporate performance we show that state control resulted in declining and even negative corporate performance. Integrated state control was shown to be mostly inferior when compared with private types of ownership. State ownership positions are in striking contrast with the lack of capacity to push corporate performance in order to collect larger tax volumes. Lack of focus and inter-agency cooperation as well as the simple inefficiency of the state bureaucracy are the most likely reasons behind our findings.

La golden share como instrumento de control estatal en empresas privatizadas DOI:10.5007/2177-7055.2010v31n60p75

This paper is concerned with the mechanism of golden share, a British invention carried out in order to serve as a state’s control instrument in privatized enterprises since the 1980’s, emulated by the other European countries with varied denomination and similar purpose. It presents European Court of Justice’s case law on golden share that has prompted it to annul many Member State’s rules that infringed, through such restrictions, the principles of free movement of capital and freedom of establishment. Finally, it examines the adjustment of the mechanism to the Brazilian legislation, under the title of acao de classe especial (action of special class), its disposal in the articles of association of specific privatized enterprises and the prominence that such instruments have had in the latest years, causing the fear of renationalization by investors.

The Compatibility of the Polish State’s Golden Shares with EC Law

The paper deals with the issue of the compatibility of the Act on Special Powers of the Treasury and Their Exercise in Companies of Special Importance for Public Order or Public Security with the freedom of capital movements in the context of ECJ jurisprudence. The first part of the paper analyses the concept of the freedom of capital movements, as well as the concept of the golden share as a restriction on this freedom, on the basis of individual ECJ judgments. The next part covers legal solutions adopted in the Polish Act, namely its subjective scope, the rights of the Minister of Treasury in companies in which the State Treasury is entitled to a golden share, the nature of these rights, and the institution of Treasury observers. The final part of the paper examines the compatibility of the golden shares model adopted by the Polish legislator with ECJ jurisprudence. In particular, the authors seek to predict what the ECJ would hold if the European Commission were to bring an infringement case against Poland. This analysis deals with the following issues: the Polish Act as a restriction on the freedom of capital movements, the possible justifications of this restriction and the proportionality of the golden shares model adopted by Poland. As their final conclusion, the authors express the view that the Polish provisions governing the State Treasury’s golden shares in principle conform with the ECJ’s guidelines, although some features of the Polish golden share system can be questioned.

Greek Legislation on Strategic Investments; the Next Golden Share Case before the European Court of Justice?

In 2008 Greece introduced legislation to curtail the right of investors to increase their shareholding in ‘strategic’ companies beyond certain levels and thereby to acquire control over those companies. In the opinion of the European Commission, however, this legislation constitutes a restriction on the free movement of capital and the freedom of establishment in the EU.

The Legality of the 'Golden Share' under EC Law

Privatisation is still an ongoing process for most of the Member States of the European Union. The beginning of the privatization initiatives started from the United Kingdom during the Margaret Thatcher’s time. Liberalization process was seen as a way to achieve a high level of competitiveness of the market. Thirty years later the privatization is still an issue of high importance. The transfer of the state assets to the private sector needs to be ensured and secured through the retention of a certain state control especially over the formerly state owned enterprises which provide services of general economic interest. According to the EC Treaty when the European Internal Market is concerned the fundamental principle of free movement of capital should be respected. Among the possible restrictions of this principle is considered to be the use of the so called golden share, special right that is used by the government in order to keep a certain level of control in the management of the privatized companies. During the last ten years it is very much arguable to what extend could be proved that the use of the golden share” device is legal and in line with the EC Treaty, the provisions of the secondary EC legislation and the existing ECJ case law . The aim of this article is to give a brief overview of what the reasons for the application of the golden share as a legal tool are, to define what their legal nature is, to identify how and when this legal mechanism could be used and accepted as permissible and when it is considered to be a restriction on the free movement of capital principle. The article is also analyzing the decisive approach and the proportionality test used by the ECJ.

State Ownership and Control in the Czech Republic

We analyze the extent of the integrated control of the state over privatized firms during the post-privatization decade (1995–2005) in the Czech Republic. During this period the integrated control potential of the state resembled a corporate pyramid. While pyramidal control was not fully utilized, the golden share in the hands of the state substantially enhanced its ability to control firms. In terms of corporate performance we show that state control resulted in declining and even negative corporate performance. Integrated state control was shown to be mostly inferior when compared with private types of ownership. State ownership positions are in striking contrast with the lack of capacity to push corporate performance in order to collect larger tax volumes. Lack of focus and inter-agency cooperation as well as the simple inefficiency of the state bureaucracy are the most likely reasons behind our findings.

Origem e desenvolvimento das golden shares

O artigo trata da origem das golden shares, no Reino Unido, e de sua adoção na França, Itália e, principalmente, no Brasil. Além disso, descreve as decisões da Corte de Justiça da União Européia a respeito do tema. Ao final, sistematiza as principais características das golden shares e aponta os debates surgidos, no Direito Privado, em razão da emissão de golden shares por sociedades anônimas.

News from Luxembourg - Is the New EU Investment Law Taking Shape?

This article comments on five judgments of the European Court of Justice, adopted in 2007 and 2008, which concern barriers to capital movements between EU Member States and to/from third countries. Four judgments are so-called golden share cases - the Volkswagen and Federconsumatori judgments, and two judgments relating to Spain's energy regime. The fifth case - Skatteverket v A - deals with international taxation. The articles argues that the five judgments taken together may give a glimpse of what the future EU investment law could look like: Measures seen as restrictive of intra-EU investment may continue to face tough scrutiny by the EU courts, while measures restricting non-EU investment may be treated more leniently.

The ECJ, Volkswagen and European Corporate Law: Reshaping the European Varieties of Capitalism

On 23 October 2007, the European Court of Justice handed down its much-awaited Volkswagen decision (Case C-112/2005), following a suit launched by the Commission against the Federal Republic of Germany in 2005. The Volkswagen statute, through which first the Federal government together with the Land (federal state) of Niedersachsen (Lower Saxony), later only Lower Saxony, had reserved a veto against majority acquisition while only holding a fifth of all shares, had come into the Commission's purview as part of its large-scale attempts at reforming and modernizing European company law. The preparatory steps in that regard had been the suits brought by the Commission with regard to other, 'golden share' provisions under Portuguese, French, Belgian and English company laws in recent years. Yet, the Volkswagen decision of the ECJ is of interest in more than one respect. Not only does it constitute a continuation and further accentuation of a line of argument that the Court has been unfolding over past few years with regard to the Member State provisions in conflict with the EC's guarantee of the free movement of capital as laid down in Art. 56 EC. In addition, the impact of the ECJ's new ruling will have to be assessed in the context of a high-powered regulatory field, in which member states, the Commission, and the Court have been finding themselves in an ongoing negotiation and contestation of historically grown company law regimes and the pressures of globalizing capital markets. In that regard, the Volkswagen decision raises a host of questions relating to the Commission's future agenda of corporate governance reform on the one hand and the persisting differences among member states' corporate law regimes on the other. The following article lays out the Court's reasoning, before observing both the immediate and the more long-term effect of the decision.

The ECJ, Volkswagen and European Corporate Law: Reshaping the European Varieties of Capitalism

On its website “The EU Single Market – Fewer barriers, more opportunities”, the European Commission lists the judgments by the European Court of Justice [ECJ] dealing with the free movement of capital under Art 56 EC Treaty (ex 73b). The latest update of this list is the Court'sVolkswagendecision of 23 October 2007 (Case C-112/2005), which the Commission had launched against the Federal Republic of Germany on 4 March 2005. This suit, brought under Art. 226 EC Treaty, had been long coming. That the Volkswagen statute, which effectively gave the Federal government and theLand(federal state) ofNiedersachsen(Lower Saxony) a veto against majority acquisition while only holding a fifth of all shares, would come into the Commission's purview, could hardly surprise, given the Commission's activity with regard to such ‘golden share’ provisions under Portuguese, French, Belgian and English company laws. The most recent decision of the ECJ in the case of Volkswagen is of interest in more than one respect. Not only does it constitute a continuation and further accentuation of a line of argument that the Court has been unfolding over past few years with regard to the Member State provisions in conflict with the EC's guarantee of the free movement of capital as laid down in Art. 56 EC.

Does Government Ownership Affect the Cost of Debt? Evidence from Privatization

We explore whether retained government ownership affects the cost of debt for fully and partially privatized companies during 2001-2005 using 811 observations of bond-specific and firm-specific panel data. On average, a one percentage point decrease in government ownership is associated with an increase in the credit spread, used as a proxy for the cost of debt, by one-half of a basis point, suggesting the importance of implicit government guarantees. However, post-privatization firm improvements allow fully privatized companies to enjoy lower credit spreads than partially privatized firms. These results indicate the cost of a lengthy privatization process where ownership uncertainty and bondholder-shareholder conflicts force debt pricing upwards. The presence of a golden share serves to delineate the state’s role in partially privatized firms, resulting in a lower cost of debt. In fully privatized companies, however, this remnant of government control is associated with higher spreads. Credit ratings, firm profitability, and euro-denominated bonds exhibit consistent negative associations with the rate at which companies can borrow funds from the capital markets. A treatment effects model accounting for characteristics that drive governments’ ownership retention corroborates our results. Among other factors governments seem more likely to retain stakes when the unemployment rate is higher and when the national GDP is growing.

Origin and concentration

AbstractWe analyse the effects of different types and concentration of ownership on performance using a large population of firms in the Czech Republic after mass privatization. Specifications based on first‐differences combined with instrumental variables show that the performance effects of different types and concentration of ownership are limited when compared to earlier studies. Often, concentrated ownership has a positive effect, a finding that supports the agency theory. The positive effect of foreign ownership is detected primarily for majority ownership and for ownership by foreign industrial firms. The state as a holder of the golden share has a positive effect on employment and sometimes, also on output and profitability. Overall, our results highlight the benefits of strategic restructuring accompanied by an inflow of new capital and managerial culture.

Origin and Concentration: Corporate Ownership, Control and Performance

We analyze the effects of different types and concentration of ownership on performance using a population of firms in a model transition economy after mass privatization. Specifications based on first-differences and unusual instrumental variables show that contrary to conventional wisdom, the effects of privatization and different types of ownership are limited and many types of private owners do not generate performance that is different from that of firms with state ownership. Concentrated ownership has a positive effect but only in some instances and a positive effect of foreign ownership is detectable primarily for majority ownership and foreign industrial firms. The effects of concentrated ownership support the agency theory and go against theories stressing the positive effects of managerial autonomy. Our results are also consistent with managers or stockholders looting the firms. The state as a holder of the golden share has a positive effect on employment and in some specifications also on output and profitability. Overall, our results suggest that the expectations and earlier findings of positive effects of privatization on performance were premature, with the effects of many types of ownership being indistinguishable from that of state ownership.

Privatization, corporate control and regulatory reform: the case of Telefonica

This study analyzes the interaction of agency problems in public policy and of agency problems inside the firm: it investigates the case of a large privatized firm subject to many policy constraints. The last steps of Telefonica's privatization were designed to promote a dispersed ownership and give managers a high level of discretion in running the company. This effectively created an agency problem inside the firm. There were no powerful shareholders to constrain the managers, and the threat of a takeover was not a credible one, since the government kept a golden share. There is no overall evidence of capture of politicians and regulators by managers in the interest of shareholders, although evidence suggests the existence of collusion between politicians and managers. The authors interpret the political interference with the firm's control (a well-documented phenomenon both in this study and in the cross-country literature on privatization; e.g. political ends in privatization, influence in appointments, golden shares) as the most visible part of such collusion. Liberalization and multi-level regulation will likely make any type of collusion or capture more difficult in the future.

Ownership, Control and Corporate Performance After Large-Scale Privatization

We analyze the effects of ownership type and concentration on performance of a population of firms in a model large-scale privatization economy (Czech Republic). Using specifications based on first-differences and unique instrumental variables, we find that few types of private ownership improve dynamic post-privatization performance. Concentrated foreign (but not domestic) ownership improves some measures of performance relative to state ownership. Foreign investors engage in strategic restructuring by increasing the rate of change of sales, while domestic private owners reduce the rate of change of sales and labor cost without increasing profitability. The effects of concentrated foreign ownership support the agency theory and go against theories stressing the positive effects of managerial autonomy and initiative. Our results are also consistent with the thesis that large domestic stockholders are not improving performance because they loot the firms. We find some support for the hypothesis that firms restructure by first lowering and later increasing the rate of change of employment. The state as a holder of the golden share has a positive effect on employment, while stimulating profitable restructuring. The state hence appears as a more economically and socially helping agent than in some recent studies.

Modern Company and Capital Market Problems: Improving European Corporate Governance After Enron

Improving European corporate governance after Enron requires company and capital market law reforms. This article discusses shareholder decision-making; the choice between the onetier and the two-tier board system; appointment, compensation and audit committees with a majority of independent members; checks on exorbitant payments to the directors; a special investigation procedure and wrongful trading. As to capital markets a European framework rule on prospectus liability is proposed. A key problem is the need for loyal and competent intermediaries. If the 13th Directive on takeovers fails, then hopes will be pinned on the Court to continue its golden share case law. The German Volkswagen Act will be the test case.

Golden Shares - State Control in Privatised Companies: Comparative Law, European Law and Policy Aspects

Golden Shares are a much debated issue since the European Court of Justice delivered three relevant judgments on June 4, 2002. The debate concerns rights that the State continues to hold after privatising formerly state owned enterprises, even if its shareholding is reduced to a minimum or no longer exists. State owned enterprises and their different possible forms are the starting point, but only of minor interest for our discussion. Instead, we focus on special rights arising during this process, as well as comparable instruments of general company law. And indeed the issue is rather one of company law: By far the majority of special rights depend on the ownership of one (Golden) share, and accordingly raise the question of equal rights conferred by shares (one share, one vote). In any event, special rights alter decision powers in a company as well as the development of its ownership structure. In order to structure the material we distinguish, on the one hand, different types of rights conferred on the state body (as well as possible counterclaims and rights of review granted to investors). This is not a purely technical question: Whether the issue falls under company and capital market law, or substantially under public law, is dependent upon this point. The second distinction is that of the instrument in which these rights are embedded. In essence, two different types of rights are granted. On the one hand, there are special rights which relate to the decision process of one body of the company, principally the general meeting. Corporate Governance is changed. Subject matters might concern fundamental decisions but also management decisions of strategic importance. A right to appoint board members can produce similar results. On the other hand, there is a second type of rights which can be granted: rights to influence the shareholder structure of the company which is not part of the company's business as such. In these cases, veto rights are given in the event that the shareholding of one person exceeds certain thresholds. Both types of rights may take various forms that are functionally comparable. As a consequence of the ECJ judgements, it will be important whether the exercise of the right conferred can be challenged on the grounds that the risk for the company or the general public against which the right should give protection did not exist in this particular case. Of equal importance is the procedural arrangement. Immediately after publication of the ECJ judgements, interested parties quickly discounted any relevance for the Volkswagen legislation, the most important German privatisation law. We argue that the decisions might even have much broader effects on general company law. The ECJ focused on whether access to any capital investment is legally or factually prevented or merely made less attractive. Therefore, any arrangement that reduces decision making power of shareholders might be relevant. One has to see how the land lies by taking into account comparable phenomena with respect to the typical features of the Golden Share, and by asking whether the criteria applied by the ECJ are of any relevance as to these phenomena. From a systematic European law perspective as well as a matter of value judgement, it is of utmost importance that these considerations apply equally to constructions granting additional rights to private law subjects, for they too impinge upon other shareholders' rights with regard to their voting power or their freedom of decision-making. The standard of review applied by the Court of Justice has been particularly strict where veto rights had been granted with respect to transactions influencing the shareholder structure. The most important example are rules that in fact prevent take-overs: voting caps or multiple voting rights, but also the arsenal of defensive measures that some legislators grant to the management.

Ownership and Firm Performance after Large-Scale Privatization

We analyze the effect of ownership on post-privatization performance in a virtually complete population of medium and large firms privatized in a model large-scale privatization economy (Czech Republic). We find that concentrated foreign ownership improves economic performance, but domestic private ownership does not, relative to state ownership. Foreign firms engage in strategic restructuring by increasing profit and sales, while domestic firms reduce sales and labor cost without increasing profit. Ownership concentration is associated with superior performance, thus providing support to the agency theory and evidence against theories stressing the positive effects of managerial autonomy and initiative. Our results are also consistent with the thesis that the presence of a large domestic stockholder may not result in a superior performance if this shareholder loots the firm. We find support for a version of the hypothesis that firms restructure by first lowering and later increasing employment. The state as a holder of the golden share stimulates profitable restructuring while pursuing an employment objective, which is understandable in a period of rising unemployment. Our results hence portray the state as a more economically and socially beneficial agent than do some other recent studies.

Modern Company and Capital Market Problems: Improving European Corporate Governance after Enron

Improving European corporate governance after Enron requires rethinking company and capital market regulation and law reforms. This article - which is an updated version (footnotes and references only, summer 2006) of an earlier one published in (2003) 3 Journal of Corporate Law Studies 221-268 - discusses shareholder decision-making; the choice between the one-tier and the two-tier board system; appointment, compensation and audit committees with a majority of independent members; checks on exorbitant payments to the directors; a special investigation procedure and wrongful trading. As to capital markets a European framework rule on prospectus liabilty is proposed. A key problem is the need for loyal and competent intermediaries. Since the 13th Directive is only a compromise solution, the hopes are pinned on the Court to continue its golden share case law. The German Volkswagen Act will be a test case.

Turn of the Tide?: The “Golden Share” Judgements of the European Court of Justice and the Liberalization of the European Capital Markets

There is hardly a set of legal institutions that has more contributed to the creation of the common market than the fundamental freedoms enshrined in the Treaty of Rome. The expanding concepts of freedom of establishment and of free movement of goods, persons, services and capital have, during the thirty years since the European Court of Justice\'s (ECJ) decision in \”Dassonville\”, by far become the Community\'s most effective deregulatory instruments. The driving force behind this development has been the case law of the Court. This case law has, on an initially slim basis in the Treaty, established the fundamental freedoms as the central element of a \“new legal order\” which has direct effect, results in the automatic inapplicability of incompatible national law and which can be invoked by every citizen in national administrative or judicial proceedings. Furthermore, it is enforced not only by Community institutions but also by EU-citizens acting as \“private public attorneys\” when bringing claims under European law against Member States for damages resulting from violations of the Treaty.