CMS StructureKoGuan Law School

Zhou Renjie

I. Definition of CMS

Controlling-Minority Structure (CMS)

Dispersed Ownership (DO)

Controlled Structure (CS)

DO CMS CS

Combine the incentive problems associated with both the CS and DO in a single ownership structure?

I. Definition of CMS

Cash Flow

Agency Cost

I. Definition of CMS

Separation of Control from

Cash Flow Right

Dual Class Equity Structure

Stock Pyramids

Cross-ownership Structures

II. Three CMS Forms

II. Three CMS FormsA. Dual Class Equity Structure

Controller’s Share

• More voting rights

Other Shareholders’

Share• Less voting

rights

1. Structure

II. Three CMS FormsA. Dual Class Equity Structure

2. Incidence

Not the most common CMS structure

Reason Corporate Law Restrictions

Partly

Common in Sweden and South Africa

II. Three CMS FormsB. Stock Pyramids

1. StructureControlling Sharehold

erCompany

A

Control Company

AControl

Company B

CompanyN

Company in CMS Form

……

II. Three CMS FormsB. Stock Pyramids

1. StructureControlling

Shareholder

Company A

…………

Company N

Cash Flow R ightsIn Company N

II. Three CMS FormsB. Stock Pyramids

2. Incidence

the most common CMS structureQuite common in Asian

companies

II. Three CMS FormsC. Cross-ownership Structures

1. Structure

Company A

Company B

II. Three CMS FormsC. Cross-ownership Structures

1. Structure

Controller

1

2 ……n

II. Three CMS FormsC. Cross-ownership Structures

1. Structure

𝒔𝒊+∑𝒋=𝟏

𝒏𝑺𝒊𝒋>

𝟏𝟐

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

Reasonthey make the locus of control over companies

less transparent

II. Three CMS FormsC. Cross-ownership Structures

The Geography of Shareholder Engagements

KoGuan Law SchoolZhou Renjie

I. Definition ofShareholder 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

Email

Telephone Call

…………

II. Engagement Tools

II. Engagement Tools

Main Engagements Tools

Active Voting / Shareholder Proposals at Annul General

Meeting

Class Action Lawsuit

Direct Engagements

Management Meeting

Email

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 ToolsAuthor’s View

Wall Street WalkMy 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

Email

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 ToolsWhy to take private engagements?

Dispersed Shares

Coordinating Cost

Collective Action

Free Rider

Problem

Inefficiency in Collective Action

40%

28%

32%Governance IssuesSocial IssuesEnvironmental Issues

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 1999-2009

• 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)

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QuestionsWhich 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

SampleSampleAll of the asset manager’s engagement activities at 397 unique “priority” firms located in 37 different countries from 2006-2011

Priority FirmsFor these firms, both the engagement agent and the institutional clients view immediate engagement action regarding ESG policies as necessary.environmental,

social and governance

Phenomenon 1Firms from the UK get significantly more objectives (设定了更多政策目标 )

Home Bias

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 2Larger 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?

Determinants other than Geography

ExplanationThese firms make up for a large part of the relevant investment portfolio.

More benefits!

VI. Question 1: Which firms does the institutional investor engage with and

how does geography drive the intensity of such engagements?

Determinants other than Geography

Explanation1. 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 3There is a positive relationship between the number of past engagements and the number of current engagements.

What drove more past engagements?1. Closer Collaboration2. Poorer Performance

“Path Dependency”!

PhenomenonFirms 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?

Explanation1. 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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Vobis Gratias Ago