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P946_Corporation_Finance

P946_Corporation_Finance - One Share One Vote Piet Sercu...

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One Share, One Vote? Piet Sercu and Tom Vinaimont First draft: March 2001; this version: September 2002 Preliminary — comments very welcome We thank Linda Van de Gucht, Cynthia Van Hulle, Martina Vandebroek, participants in workshops at KU Leuven and Universities of Antwerp and Ghent, at the 2002 VEV Conference, for useful comments and criticisms. All remaining errors are the authors’. KU Leuven, Graduate School of Business Studies, Naamsestraat 69, B- 3000 Leuven; email: [email protected] Corresponding author; Department of Economics & Finance, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong; email: [email protected]
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Abstract Confusingly, the two seminal contributions on the “one share, one vote” (1S1V) issue— Grossman and Hart (GH, 1988) and Harris and Raviv (HR, 1989)—are quoted as evidence by both proponents and opponents of 1S1V. In fact, GH-HR stress the cases where the rule is optimal, but do acknowledge possible deviations from the optimality of 1S1V (without devel- oping these cases). In light of renewed interest in the relation between shareholder protection and control arrangements, we first thouroughly review the optimality of 1S1V in the original setting, without the complication of structural changes (except that both incumbent and rival management can have private benefits simultaneously). After this analysis of the ex post op- timal charter, ( i.e. at the moment the rival appears and his characteristics are observed), we also consider the ex ante problem where the entrepreneur-founder only knows the distribution from which the rival will be drawn. The issue is what set of rules the entrepreneur will put in place, re take-overs, so as to maximize the IPO value of the firm. We find that, from the founder’s perspective, 1S1V is never optimal ex ante , and ex post optimality is surprisingly rare. Lastly, we go beyond the dual-class case, explaining the role and usefulness of multiple-class structures. Keywords: Corporate Control, Security Design, Takeovers. JEL-codes: G32, G34.
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One Share, One Vote? Introduction This note examines how voting structure and take-over rules can influence the value of a company and whether deviations from the one-share one-vote (1S1V) rule create extra value for the initial shareholders of the firm. The seminal papers in the literature on voting structure, Grossman and Hart (GH, 1988) and Harris and Raviv (HR, 1989), derive conditions for the optimality of 1S1V. Both papers have a similar set-up (which we adopt here, too). Specifically, there are two types of cash flows: the security benefits accruing to the security holders, and the private benefits obtained by the controlling party. A rival management team attempts to dismiss the incumbent managers and take control of the target firm. Incumbent and rival teams have different management abilities, which affects the level of both the security benefits and the private benefits. GH argue that, by and large, 1S1V is optimal. They do acknowledge
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