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 the right to nominate and elect minority directors on the board, as a pathway for limiting the principal-principal agency problem. However, not enough attention has been paid to the distinction between de jure and de facto controlled companies. Building on a recent case concerning a leading Italian corporation, this Article analyzes the possible unexpected corporate governance consequences of successful activist intervention at de facto controlled companies, showing that, where minority shareholders are granted the right to appoint directors on the board, such a distinction can be relevant. Under certain conditions, the interplay of activism, shareholder rights and de facto control can result in an inefficient corporate governance structure. In situations where institutional investors make up a significant portion of a company’s shareholder base, and board representation rights apply, institutions teaming up with activists can bring about changes in the governance structure of the firm, particularly at the board level, so substantive that they reverse the balance of power between minority and majority shareholders—an outcome not even conceivable at de jure controlled companies. In such situations, both the disadvantages of not having a controller and those associated with contestable control combine. In addition, the monitoring role played by non-activist institutional shareholders becomes pivotal. Highlighting the potential unexpected corporate governance effects of activism at de facto controlled companies can help frame the U.S. debate surrounding shareholder empowerment and refine the claim that activists’ board representation could solve the principal-principal agency problem at controlled companies as well as complement the skeptical view about promoting shareholder engagement without more closely considering the impact of engagement-related costs