Activist shareholders at de facto controlled companies


Activist campaigns are likely to increasingly target controlled companies. Studies concerning activism at controlled companies focus on shareholder-empowering tools, such as board representation rights, as a pathway for reducing majority-minority agency costs. However, no clear dividing line between de jure and de facto controlled companies is drawn when analyzing the potential corporate governance effects of successful activist intervention. Building on the recent Telecom Italia case, this Article analyzes the possible worrisome corporate-governance consequences of successful activist intervention at de facto controlled companies, showing that such a distinction is not a trivial one. Under certain conditions, the interplay of activism and de facto control predicts instability, or at least inefficiency, at the corporate governance level following successful activist intervention. Where board representation rights apply and the shareholder base includes a significant share of institutional investors, institutions’ teaming up with activists can bring about substantial changes in the governance structure of the form, typically at the board level, and terminate control, regardless of any change in corporate ownership and the voting rights. Reversing the ordinary balance of powers between minority and majority shareholders whilst not correspondingly shifting corporate control can bring about a situation characterized by both the disadvantages of not having a controller and those associated with contestable control. In such a situation, the monitoring role to be played by institutional shareholders is bound to be pivotal. This Article warns to potential corporate governance pitfalls of activism at de facto controlled companies within a regulatory environment that ensures shareholder board representation, and complements the skeptical view about promoting shareholder engagement with a view to the risk of institutions’ inadequate monitoring.