Browsing by Author "Luhtala, Antti"

This thesis employs the law and economics method and explores the topic of equity decoupling, which refers to the separation of the control and economic rights of shares. It is the aim of the thesis to answer the questions of what has driven the equity decoupling phenomenon and how has equity decoupling changed the key fundamental paradigm that control rights and cash-flow rights of shares are inseparable. Furthermore, answers are also provided to the questions of what kind of implications do the new developments have, how have regulators responded and how should they respond to the new developments. The research questions are answered by first discussing the basics of corporate theory: what is a corporation, why does it exist, what are shares and what are the properties of shares. It is argued that the two main components of shares, control and economic rights, have in traditional corporate theory been considered inseparable. Since then, a shift in this fundamental paradigm of corporate law theory has occurred. This paradigm change has led to circumstances under which investors are able to separate control and economic rights and trade these components in the financial markets. Two main drivers have driven the paradigm change. Firstly, marketization and complete market developments have resulted in an economic environment in which everything is tradable and liquid. This driver has provided the supply of equity decoupling. Secondly, changes in the theory of investment and ownership structures have resulted in the dominance of financial intermediaries. The concentration of ownership under well-diversified financial intermediaries has resulted in undervaluation of governance rights. This undervaluation has been targeted by activist investors, who have taken the role of gap-fillers in corporate governance. The activist investors’ need for empty voting and hidden ownership, the two subcategories of equity decoupling that can be described as different sides of the same coin, have been the creative force behind the demand for equity decoupling. Equity decoupling strategies may have both positive and negative effects in terms of economic efficiency. Thus far the academic literature has, however, mostly focused on the possible detrimental side of equity decoupling by adopting an approach that is too narrow. At the same time, some commentators have failed to understand the paradigm change behind the equity decoupling phenomenon. This thesis embraces the possibility that equity decoupling may under certain circumstances be efficient and therefore desirable. In this light, a critical analysis of the proposed and already taken regulatory actions is provided. The conclusion of this thesis is that it should be carefully considered whether equity decoupling should be regulated at all and, if so, to what extent. It is possible that the positive effects of equity decoupling outweigh the negative ones. Thus, equity decoupling may be efficient in terms of social welfare.