(a) The family-owned company

By “family-owned” we mean that the shareholders have been made up of members of the same family for several generations and, often through a holding company, exert significant influence over management. This is still the dominant model in Europe. The following table shows the shareholder base of the 50 largest companies by market capitalisation in several countries (2021):

Source: Company data, FactSet.

However, this type of shareholder structure is on the decline for several reasons:

• some new or capital-intensive industries, such as energy/utilities and banks require so much capital that a family-owned structure is not viable over the long term. Indeed, family ownership is more suited to consumer goods, retailing, services, processing, etc.;
• financial markets have matured and financial savings are now properly rewarded, so that, with rare exceptions, diversification is a better investment strategy than concentration on a specific risk (see Section 18.6);
• increasingly, family-owned companies are being managed on the basis of financial criteria, prompting the family group either to exit the capital or to dilute the family's interests in a larger pool of investors that it no longer controls. This trend requires a nuanced view as, in recent years, certain young companies whose founders remain very important shareholders (Contentsquare, Doordash, Iliad, and so on) have taken up a prominent role within the economy.

Family shareholding sometimes reappears in the form of family offices, emanating from large industrial families (Desmarais in Canada, Quandt in Germany, Frère in Belgium, etc.) that invest in financial fundamentals, but with a much longer-term perspective than traditional funds.

Some research has demonstrated that family-owned companies register on average better performance than non-family-owned companies. Having most of your wealth in one single company or group is a strong incentive to properly monitor its managers or to act responsibly as its manager.

(b) Business angels

See Chapter 40.

(c) Private equity funds

Private equity funds, financed by insurance companies, pension funds or wealthy investors, play a major role. In most cases these funds specialise in a certain type of investment: venture capital, development capital, LBOs (see Chapter 47) or turnaround capital, which correspond to a company's different stages of maturity.

Venture capital funds focus on bringing seed capital, i.e. equity, to start-ups to finance their early developments.

Development capital funds become shareholders of high-growth companies that require substantial funds.

LBO funds invest in companies put up for sale by a group looking to refocus on its core business or by a family-held group faced with succession problems, or help a company whose shares are depressed (in the opinion of the management) to delist itself in a public-to-private (P-to-P) transaction. LBO funds are keen to get full control over a company (but control can be exercised by 2 or 3 funds) in order to reap all of the rewards and also to make it possible to restructure the company as they think best, without having to worry about the interests of minority shareholders. Therefore, they usually prefer the target companies not to be listed (or to be delisted if the target was public), but the fund itself can be listed.

Turnaround funds work with distressed companies, helping them to turn themselves around.

Activist funds have made a speciality of putting public pressure on poorly performing or badly structured groups, proposing corrective measures to improve their value. In 2020, for example, Amber was proposing a complete overhaul of Lagardère's board of directors, a change of strategy and the abandonment of the limited partnership status that protects the founder's heir, who has not demonstrated the same qualities. This has been implemented in 2021.

Managed by teams of investment professionals whose compensation is largely linked to performance, these funds have a limited lifespan (no more than 10 years). Before the fund is closed, the companies that the fund has acquired are resold, floated on the stock exchange or the fund's investments are taken over by another fund.

Some private equity funds take a minority stake in listed companies, a PIPE (private investment in public equity), helping the management to revitalise the company so as to make a capital gain. For example, in 2019, Searchlight Capital took a 26% stake in Latécoère and changed the CEO in 2020. In 2020–2021, the creation of SPACs by private equity funds allowed them to invest in companies on a minority basis when they went public using this technique.

Private equity funds play an important role in the economy and are a real alternative to a listing on the stock exchange. They solve agency problems by putting in place strict reporting from the management, which is incentivised through management packages and the pressure of debt (LBO funds).

They also bring a cash culture to optimise working capital management and limit capital expenditure to reasonably value-creating investments. Private equity funds are ready to bring additional equity to finance acquisitions with an industrial logic. They also bring to management a capacity to listen, to advise and to exchange, which is far greater than that provided by most institutional investors. They are professional shareholders who have only one aim – to create value – and they do not hesitate to align the management of companies they invest in with that objective.

(d) Institutional investors

Institutional investors are banks, asset managers, insurance companies, pension funds and unit trusts that manage money on behalf of private individuals. Most of the time they individually own minor stakes (less than 10%), but they play a much bigger role as they define the stock market price of companies in which they collectively represent the major part of their floating capital.

Because of new regulations on corporate governance (see Chapter 43), they vote at AGMs more frequently, especially to defeat resolutions they do not like, notably regarding excessive compensation.

(e) Financial holding companies

Large European financial holding companies such as Deutsche Bank, Paribas, Mediobanca, Société Générale de Belgique, etc. played a major role in creating and financing large groups. In a sense, they played the role of the (then-deficient) capital markets. Their gradual disappearance or mutation has led to the breakup of core shareholder groups and cross-shareholdings. Today, in emerging countries (Korea, India, Colombia), large industrial and financial conglomerates play their role (Samsung, Tata, Votorantim, etc.).

(f) Employee-shareholders

Many companies have invited their employees to become shareholders. In most of these cases, employees hold a small proportion of the shares, although in a few cases the majority of the shares. This shareholder group, loyal and non-volatile, lends a degree of stability to the capital and, in general, strengthens the position of the majority shareholder, if any, and of the management.

The main schemes to incentivise employees are:

• Direct ownership. Employees and management can invest directly in the shares of the company. In LBOs, private equity sponsors bring the management into the shareholding structure to minimise agency costs.
• Employee stock ownership programmes (ESOPs). ESOPs consist in granting shares to employees as a form of compensation. Alternatively, the shares are acquired by shareholders but the firm will offer free shares so as to encourage employees to invest in the shares of the company. The shares will be held by a trust (or employee savings plan) for the employees. Such programmes can include lock-up clauses to maintain the incentive aspect and limit flowback (see Section 25.2). In this way, the shares allocated to each employee will vest (i.e. become available) gradually over time.
• Stock options. Stock options are a right to subscribe to new shares or shares held by the company as treasury stocks at a certain point in time.

For service companies and fast-growing companies, it is key to incentivise employees and management with shares or stock options, as the key assets of such companies are their people. For other companies, offering stock to employees can be part of a broader effort to improve employee relations (all types of companies) and promote the company's image internally. The success of such a policy largely depends on the overall corporate mood. In large companies, employees can hold up to 10%. Lehman, the US investment bank, was one of the listed companies with the largest employee shareholdings (c. 25%) when it went into meltdown in 2008.

Regardless of the type of company and its motivation for making employees shareholders, you should keep in mind that the special relationship between the company and the employee-shareholder cannot last forever. Prudent investment principles dictate that the employee should not invest too heavily in the shares of the company that pays their salaries, because in so doing they, in fact, compound the “everyday life” risks they are running.²

Basically, the company should be particularly fast-growing and safe before the employee agrees to a long-term participation in the fruits of its expansion. Most often, this condition is not met. Moreover, just because employees hold stock options does not mean they will be loyal or long-term shareholders. The LBO models we will study in Chapter 47 become dangerous when they make a majority of the employees shareholders. In a crisis, the employees may be keener to protect their jobs than to vote for a painful restructuring. When limited to a small number of employees, however, LBOs create a stable, internal group of shareholders.

(g) Governments

In Europe and the USA, governments' role as the major shareholders of listed groups is fading, even if they are still majority shareholders of large industry players (Deutsche Bahn, EDF, Enel) or playing a key role in some groups like Deutsche Telekom, Airbus or Eni. State ownership had a period of revival thanks to the economic crisis, as some groups were taken over to avoid collapse (General Motors, RBS) or funds were injected through equity issues to reinforce financial institutions (Citi, ING, etc.).

At the same time, sovereign wealth funds, mostly created by emerging countries and financed thanks to reserves from staples, are gaining importance as long-term shareholders. They are normally very financially minded, but their opacity, their size (often between €50bn and €500bn) and their strong connections with mostly undemocratic states are worrying to some. As of end 2020, they had c. $9,070bn under management, and slowly growing. The most well-known include The Government Pension Fund of Norway, Norges ($1,290bn), China Investment Company (CIC, $1,045bn), SAFE Investment Company and Hong Kong Monetary Authority ($978bn) from China, Abu Dhabi Investment Authority (ADIA, $745bn), GIC and Temasek in Singapore ($710bn), Kuwait Investment Authority (KIA, $562bn), etc. They are majority shareholders of a number of firms (Singapore Airlines, P&O, etc.) and minority shareholders in some listed firms such as the London Stock Exchange, Glencore, KKR, Carlyle, Foncia, etc.

(h) Crossholdings

Crossholdings peaked before the 1990s when capitalism was often capital-less. Today, the very few examples (Renault owns 43% of Nissan, which owns 15% of Renault, Spotify owns 9% of Tencent Music, which owns 7.5% of Spotify) are there to promote industrial synergies, or even to prepare for a closer future relationship, and not for financial or power reasons.

(a) Different classes of shares: shares with multiple voting rights and non-voting shares

As an exception to the general rule, under which the number of votes attributed to each share must be directly proportional to the percentage of the capital it represents (principle of one share, one vote), companies in some countries have the right to issue multiple-voting shares or non-voting shares.

In the Netherlands, the USA, Luxembourg, and the Scandinavian countries, dual classes of shares are not infrequent. The company issues two (or more) types of shares (generally named A shares and B shares) with the same financial rights but with different voting rights.

French corporate law provides for the possibility of double-voting shares but, contrary to dual-class shares, all shareholders can benefit from the double-voting rights if they hold the shares for a certain time.

Multiple-voting shares can be particularly powerful; for example, the founders of Alphabet (ex. Google) have 53.1% of voting rights of Alphabet while they hold only 11.6% of the shares. Ford, Snap, Lyft, Facebook, and Roche, have also put in place this type of capital structure. These dual-class shares can appear as unfair and contrary to the principle that the person who provides the capital gets the power in a company. Some countries (Italy, Spain, Belgium and Germany) have outlawed dual-class shares.

(b) Holding companies

Holding companies can be useful but their intensive use leads to complex, multi-tiered shareholding structures. As you might imagine, they present both advantages and disadvantages.

Suppose an investor holds 51% of a holding company, which in turn holds 51% of a second holding company, which in turn holds 51% of an industrial company. Although they hold only 13% of the capital of this industrial company, the investor uses a cascade of holding companies to maintain control of the industrial company.

A holding company allows a shareholder to maintain control over a company, because a structure with a holding disperses the minority shareholders. Even if the industrial company were floated on the stock exchange, the minority shareholders in the different holding companies would not be able to sell their stakes.

Maximum marginal personal income tax is generally higher than income taxes on dividends from a subsidiary. Therefore, a holding company structure allows the controlling shareholder to draw off dividends with a minimum tax bite and use them to buy more shares in the industrial company.

Technically, a holding company can “trap” minority shareholders; in practice, this situation often leads to an ongoing conflict between shareholders. For this reason, holding companies are usually based on a group of core shareholders intimately involved in the management of the company.

A two-tiered holding company structure often exists, where:

• a holding company controls the operating company;
• a top holding company holds the controlling holding company. The shareholders of the top holding company are the core group. This top holding company's main purpose is to buy back the shares of minority shareholders seeking to sell some of their shares.

Often, a holding company is formed to represent the family shareholders prior to an IPO.

(c) Limited share partnerships (LSPs)

A limited share partnership is a company where the share capital is divided into shares, but with two types of partners:

• several limited partners with the status of shareholders, whose liability is limited to the amount of their investment in the company. A limited share partnership is akin to a public limited company in this respect;
• one or more general partners, who are jointly liable, to an unlimited extent, for the debts of the company. Senior executives of the company are usually general partners, with limited partners being barred from the executive suite.

The company's articles of association determine how present and future executives are to be chosen. These top managers have the most extensive powers to act on behalf of the company in all circumstances. They can be fired only under the terms specified in the articles of association. In some countries, the general partners can limit their financial liability by setting up a (limited liability) family holding company. In addition, the LSP structure allows a change in management control of the operating company to take place within the holding company. For example, a father can hand over the reins to his daughter, while the holding company continues to perform its management functions.

Thus, theoretically, the chief executive of a limited share partnership can enjoy absolute and irrevocable power to manage the company without owning a single share. Management control does not derive from financial control as in a public limited company, but from the stipulations of the by-laws, in accordance with applicable law. Several large listed companies have adopted limited share partnership form, including Merck KGaA, Henkel, Michelin and Hermès.

(d) Non-voting shares

Issuing non-voting shares is similar to issuing dual-class shares because some of the shareholders will bring capital without getting voting power. Nevertheless, issuing non-voting shares is a more widely spread practice than issuing dual-class shares. Actually, in compensation for giving up their voting rights, holders of non-voting shares usually get preferential treatment regarding dividends (fixed dividend, higher dividend compared to ordinary shares, etc.). Accordingly, non-voting (preference) shares are not perceived as unfair but as a different arbitrage for the investor between return, risk and power in the company. For more, see Section 24.3.

(a) Right of approval

The right of approval, written into a company's articles of association, enables a company to avoid “undesirable” shareholders or shift the balance between shareholders. This clause is frequently found in family-owned companies or in companies with a delicate balance between shareholders. The right of approval governs the relationship between partners or shareholders of the company; be careful not to confuse it with the type of approval required to purchase certain companies (see below).

Technically, the right of approval clause requires all partners to obtain the approval of the company prior to selling any of their shares to a third party, or to another shareholder if explicitly provided for in the approval clause. The company must render its decision within a specified time period. If no decision is rendered, the approval is deemed granted.

If it refuses, the company, its board of directors, executive committee, senior executives or a third party must buy back the shares within a specified period of time, or the shareholder can consummate the initially planned sale.

The purchase price is set by agreement between the parties, or in the event that no agreement is reached, by independent appraisal.

Right of approval clauses might not be applied when shares are sold between a shareholder, their spouse or their immediate family and descendants.

Most of the time, right of approval clauses for listed companies are prohibited as they run contrary to the fluidity implied in being a public company.

(b) Pre-emption rights

Equivalent to the right of approval, the pre-emption clause gives a category of shareholders or all shareholders a priority right to acquire any shares offered for sale. Companies whose existing shareholders want to increase their stake or control changes in the capital use this clause. The board of directors, the chief executive or any other authorised person can decide how shares are divided amongst the shareholders.

Technically, pre-emption rights procedures are similar to those governing the right of approval.

Most of the time, pre-emption rights do not apply in the case of inherited shares, liquidation of a married couple's community property, or if a shareholder sells shares to their spouse, immediate family or descendants.

Right of approval and pre-emption rights clauses constitute a means of controlling changes in the shareholder structure of a company. If the clause is written into the articles of association and applies to all shareholders, it can prevent any undesirable third party from obtaining control of the company. These clauses cannot block a sale of shares indefinitely, however. The existing shareholders must always find a solution that allows a sale to take place if they do not wish to buy.

(a) Reserved share issues

In some countries, a company can issue new shares on terms that are highly dilutive for the existing shareholders. For example, to fend off a challenge from the newspaper group Gannet, the Tribune Publishing group (publisher of The Chicago Tribune and The Los Angeles Times) issued 13% of its share capital in May 2016 to Patrick Soon-Shiong, placing the billionaire as Tribune's second-largest shareholder.

The new shares can be purchased either for cash or for contributed assets. For example, a family holding company can contribute assets to the operating company to strengthen its control over this company.

(b) Mergers

Mergers are, first and foremost, a method for achieving strategic and industrial goals. As far as controlling the capital of a company is concerned, a merger can have the same effect as a reserved capital increase, by diluting the stake of a hostile shareholder or bringing in a new friendly shareholder. We will look at the technical aspects in Chapter 46.

The risk, of course, is that the new shareholders, initially brought in to support existing management, will gradually take over control of the company.

(c) Share buy-backs and cancellations

This technique, which we studied in Chapter 37 as a financial technique, can also be used to strengthen control over the capital of a company. The company offers to repurchase a portion of outstanding shares with the intention of cancelling them. As a result, the percentage ownership of the shareholders who do not subscribe to the repurchase offer increases. In fact, a company can regularly repurchase shares. For example, Bic and Norilsk Nickel have used this method several times in order to strengthen the control of large shareholders.

(d) Employee shareholdings

Employee-shareholders generally have a tendency to defend a company's independence when there is a threat of a change in control. A company that has taken advantage of the legislation favouring different employee share-ownership schemes can generally count on a few percentage points of support in its effort to maintain the existing equilibrium in its capital. In 2007, for example, the employee-shareholders of the construction group Eiffage rallied behind management in its effort to see off Sacyr's rampant bid.

(e) Warrants

The company issues warrants to certain investors. If a change in control threatens the company, investors exercise their warrants and become shareholders. This issue of new shares will make a takeover more difficult, because the new shares dilute the ownership stake of all other shareholders. The strike price of the warrant is usually very attractive but the warrants can only be exercised if a takeover bid is launched on the company.

This type of provision is common in the Netherlands (ING or Philips), France (Peugeot, Bouygues) and the US. In 2018, both Bouygues' and Peugeot's AGM authorised their boards to issue such warrants should they find it necessary.

(a) Regulations

Certain investments or takeovers require approval from a government agency or other body with vetoing power. In most countries, sectors where there are needs for specific approval are:

• financial institutions;
• activities related to defence (for national security reasons);
• media;
• etc.

Golden shares are special shares that enable governments to prevent another shareholder from increasing its stake above a certain threshold, or the company from selling certain of its assets (Distrigas, Telecom Italia, Eni are some examples).

(b) Voting caps

In principle, the very idea of limiting the right to vote that accompanies a share of stock contradicts the principle of “one share, one vote”. Nevertheless, in some countries, companies can limit the vote of any shareholder to a specific percentage of the capital. In some cases, the limit falls away once the shareholder reaches a very large portion of the capital (e.g. 50% or 2/3).

For example, Danone's articles of association stipulate that no shareholder may cast more than 6% of all single voting rights and no more than 12% of all double voting rights at a shareholders' meeting, unless they own more than two-thirds of the shares. Voting caps are commonly used in Europe, specifically in Switzerland (12 firms out of the 50 largest use them), France, Belgium, the Netherlands and Spain. Nestlé, Total, and Novartis all use voting caps.

This is a very effective defence. It prevents an outsider from taking control of a company with only 20% or 30% of the capital. If they truly want to take control, they have to “up the ante” and bid for all of the shares. We can see that this technique is particularly useful for companies of a certain size. It makes sense only for companies that do not have a strong core shareholder.

(c) Strategic assets (poison pills)

Strategic assets can be patents, brand names or subsidiaries comprising most of the business or generating most of the profits of a group. In some cases the company does not actually own the assets but simply uses them under licence. In other cases these assets are located in a subsidiary with a partner who automatically gains control should control of the parent company change hands. Often contested as misuse of corporate property, poison pill arrangements are very difficult to implement, and in practice are generally ineffective. In 2021, Suez tried to fend off Veolia's bid by housing its French water business in a foundation in the Netherlands to make it non-transferable.

(d) Change-of-control provisions

Some contracts may include a clause whereby the contract becomes void if one of the control provisions over one of the principles of the contract changes. The existence of such clauses in vital contracts for the company (distribution contract, bank debt contract, commercial contract) will render its takeover much more complex.

Some “golden parachute” clauses in employment contracts allow employees to leave the company with a significant amount of money in the event of a change of control, which consequently has a dissuasive effect.