CMS Structure KoGuan Law School Zhou Renjie

I. Definition of CMS Controlling-Minority Structure (CMS) Dispersed Ownership (DO)Controlled Structure (CS)

DOCMSCS Combine the incentive problems associated with both the CS and DO in a single ownership structure? I. Definition of CMS

Separation of Control from Cash Flow Right Dual Class Equity Structure Stock Pyramids Cross-ownership Structures II. Three CMS Forms

A. Dual Class Equity Structure Controller’s Share More voting rights Other Shareholders’ Share Less voting rights 1. Structure

II. Three CMS Forms A. Dual Class Equity Structure 2. Incidence Not the most common CMS structure ReasonCorporate Law Restrictions Partly Common in Sweden and South Africa

II. Three CMS Forms B. Stock Pyramids 1. Structure Controlling Shareholder Company A Control Company A Control Company B Company N Company in CMS Form …

II. Three CMS Forms B. Stock Pyramids 1. Structure Controlling Shareholder Company A ………… Company N Cash Flow Rights In Company N

II. Three CMS Forms B. Stock Pyramids 2. Incidence the most common CMS structure Quite common in Asian companies

II. Three CMS Forms C. Cross-ownership Structures 1. Structure Company A Company B

II. Three CMS Forms C. Cross-ownership Structures 1. Structure Controller 1 2 …… n

II. Three CMS Forms C. Cross-ownership Structures 1. Structure Sij: the fraction of company i’s shares held by company j Si: the fraction of company i’s shares held by the controller The controller controls all n companies If for each i, the controller maintains

2. Incidence Popular in Asia Reason they make the locus of control over companies less transparent II. Three CMS Forms C. Cross-ownership Structures

The Geography of Shareholder Engagements KoGuan Law School Zhou Renjie

I. Definition of Shareholder Engagement Shareholder Engagement is a strategy used to open channels of communication between a shareholder and a company to improve performance of the company.

Main Engagements Tools Active Voting / Shareholder Proposals at Annul General Meeting Class Action Lawsuit Direct Engagements Management Meeting Telephone Call …… II. Engagement Tools

Main Engagements Tools Active Voting / Shareholder Proposals at Annul General Meeting Class Action Lawsuit Direct Engagements Management Meeting Telephone Call ……

Shareholder proposals, class action lawsuits and the Wall Street Walk are the most important engagement tools available to shareholders. Gillan and Starks (2000); Romano (1991); Edmans (2009); Admati and Pfleiderer (2009) II. Engagement Tools Author’s View Wall Street Walk My View 1. It is a form of shareholder activism. 2. It does not fall within the definition of “shareholder engagement”. Lack of Communication

II. Engagement Tools Main Engagements Tools Active Voting / Shareholder Proposals at Annul General Meeting Class Action Lawsuit Direct Engagements Management Meeting Telephone Call ……

The most often adopted engagement tools are also private dialogues and direct management meetings. McCahery, Sautner and Starks (2011) Private engagements may be even the most powerful way of engaging with firms in the United States. About 20 % of all shareholder proposals are withdrawn by the lead sponsoring shareholder after private negotiations with the management of the target firm have taken place. Bauer, Moers, and Viehs (2012) II. Engagement Tools

Problems in Collective Engagements Coordinating Cost Free Rider Problem II. Engagement Tools Why to take private engagements? Dispersed Shares Coordinating Cost Collective Action Free Rider Problem Inefficiency in Collective Action

III. Issues of Shareholder Engagements

IV. Institutional Investors Institutional investors are important corporate monitors. The Reason is that they have more power and incentives to monitor the firm and also to promote changes. Burkart, Gromb, and Panunzi (1997) Shleifer and Vishny (1986) Pension funds and hedge funds are important institutional activist investors. Del Guercio and Hawkins (1999) Klein and Zur(2009)

V. Does Shareholder Engagements Matters? Corporate engagements at 613 US corporations from An annul abnormal stock price reaction of 4.4% to firms Dimson, Karakas, and Li (2012) 1,894 US firms Firms are significantly more likely to honor engagements of any kind as soon as firms do receive shareholder proposals and corporate engagements by the institutional investor at the same time. Bauer et al. (2012)

Questions the institutional investor Which firms does the institutional investor engage with and how does geography drive the intensity of such engagements? Does geography drive the success of engagement activities? a British asset manager the investee firms changed their policies

Sample Sample All of the asset manager’s engagement activities at 397 unique “priority” firms located in 37 different countries from Priority Firms ESG For these firms, both the engagement agent and the institutional clients view immediate engagement action regarding ESG policies as necessary. environmental, social and governance

Phenomenon 1 Firms from the UK get significantly more objectives ( 设定了更多政策目标 ) Reasons Proximity to Target Firms Better Knowledge of the Regulatory Environment Reduced Information Asymmetries VI. Question 1: Which firms does the institutional investor engage with and how does geography drive the intensity of such engagements?

Phenomenon 2 Larger firms get relatively more objectives than their smaller counterparts. VI. Question 1: Which firms does the institutional investor engage with and how does geography drive the intensity of such engagements? Explanation These firms make up for a large part of the relevant investment portfolio.

VI. Question 1: Which firms does the institutional investor engage with and how does geography drive the intensity of such engagements? Explanation 1. A closer collaboration on particular issues raises the number of objectives that a particular firm receives in the future. 2. Poorly performing firms are more frequently targeted with private engagements. Phenomenon 3 There is a positive relationship between the number of past engagements and the number of current engagements.

Phenomenon Firms originating from the United States and Continental Europe do have higher success ratios than their UK counterparts. VII. Question 2: Does geography drive the success of engagement activities? Explanation 1.The institutional investor is particularly targeting those foreign firms for which the necessity of engagement is also highest and which therefore have the highest potential to change. 2.Firms from the UK have a tight nationwide regulation with respect to corporate governance and environmental standards that the potential of a change is also limited for domestic firms.

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