Self-Expropriation versus Self-Interest in Dual-Class Voting: The Pirelli Case Study

By Bigelli, Marco; Mengoli, Stefano | Financial Management, Fall 2011 | Go to article overview

Self-Expropriation versus Self-Interest in Dual-Class Voting: The Pirelli Case Study


Bigelli, Marco, Mengoli, Stefano, Financial Management


Called to vote for a reduction in their dividend privileges, Pirelli's nonvoting shareholders appeared to expropriate themselves and favor the voting class of shares. However, what initially seemed to be self-expropriation became self-interest when the media coverage, voting decisions, and dual-class ownership of 36,361 shareholders were investigated. Most of the institutional investors voting "for" the proposal were found to have ownership ties with controlling shareholders or to have held voting shares. Moreover, dual-class ownership significantly increased the likelihood of shareholders voting to expropriate one class of shares if they benefited from the other class in their portfolios.

**********

Low cross-border turnout at shareholder meetings combined with an increase in shares held by foreign investors have recently pushed the European Union (EU) to pass a directive (Shareholder Rights Directive 2007/36) aimed at strengthening shareholder fights and fostering participation at shareholder meetings by electronic means. The directive sets basic principles with respect to shareholder identification, communication, information, and voting. It also shrinks the procedural costs for cross-border voting (Zetzsche, 2008), but it does not address the conflict of interest in shareholder meetings and dual-class voting, although all EU countries are characterized by either multiple voting shares or nonvoting shares. (1)

In this paper, we analyze the voting process of an extraordinary resolution adopted by Pirelli, one of the world's largest tire producers and one of the major Italian listed companies. In November 2007, Pirelli's board of directors proposed to pay back part of the firm's equity by reducing the par value of both classes of shares. Since nonvoting shares were granted a minimum dividend payment set as a percentage of the par value, this proposal significantly harmed nonvoting shareholders and originated a wealth transfer between the two classes of shares. Given that the proposed plan modified the fights of the nonvoting shares, it required the approval of both Pirelli's voting and nonvoting classes of shareholders. (2) Obviously, the voting shareholders approved the plan as Pirelli was controlled by a voting pact among nine shareholders controlling 46.22% of voting rights. More surprisingly, the operation was also approved by the nonvoting class of shares, which apparently voted against their interests. However, what at first seemed to be "self-expropriation" turned out to be "self-interest" when the voting behavior and the dual-class ownership of 36,361 shareholders were investigated. Though based on a single case study, our paper provides some new contributions to three different streams of literature: 1) shareholder voting, 2) the corporate governance role of the media, and 3) shareholder expropriation.

As far as shareholder voting is concerned, the existing literature has analyzed situations when shareholders vote "sincerely" in their interests, basing their decisions on their own signals (Easterbrook and Fischel, 1983), or "strategically" by also observing the voting behavior of other shareholders (Maug and Rydquist, 2009). Other papers have addressed voting by institutional investors and found that they tend to approve management proposals even when they are detrimental to shareholder value (Brickley, Lease, and Smith, 1988) and that the approval rate is higher for institutional investors that have business ties with the related firm (Davis and Kim, 2007). Conversely, opposition to management proposals is stronger when institutions are more independent (Brickley et al., 1988) and when a negative recommendation has been expressed by the International Sales Support (ISS), the leading shareholder voting advisor (Bethel and Gillan, 2002). In a recent paper by Matvos and Ostrovsky (2008), institutional investor cross-ownership of both target and acquirer firms is found to favor approvals of value-destroying acquisitions at the acquirer's meeting. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Self-Expropriation versus Self-Interest in Dual-Class Voting: The Pirelli Case Study
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.