Strong Shareholders, Weak Outside Investors

In this paper, we consider the corporate governance challenge of protecting outside investors in listed, controlled firms. European jurisdictions are supposed to be more veteran and skilled in dealing with these firms in comparison to the U.S. But we argue that outside investors in European listed firms with controlling shareholders are poorly protected compared to U.S. investors because the distinct European approach to the protection of investors, based on empowering active shareholders rather than shielding passive investors, is not well suited for controlled, listed firms. This approach translates into a lack of definition and development of specific fiduciary duties of the controlling shareholders towards market investors. Moreover, European jurisdictions have developed strong voice rights for active shareholders, which tend to play in favour of the controlling shareholders and organized minorities but are not effective for the protection of passive outside investors and limit their exit options. This explains why shareholder protection in European jurisdictions can be considered high, while outside investors' protection can be considered low at the same time, i.e., it represents a “strong shareholders, weak outside investors” problem that increases the cost of financing for listed European firms and reduces their growth opportunities and value