Most public firms around the world have a controlling shareholder (“controller”). In these firms, a key governance objective is to protect minority shareholders from controller tunneling.
Standard tools—independent director approval for related-party transactions and the duty of loyalty—are often insufficient. Independent directors typically serve at the pleasure of the controller, undermining their objectivity (Bebchuk and Hamdani, 2017). And hurdles to litigation and controller-friendly substantive law tend to erode the effectiveness of the duty of loyalty (Enriques et al., 2017).
A potentially more powerful tool is mandating minority approval for related-party transactions (Goshen 2003; Djankov et al. 2008). This approach, now favored by the OECD, has become the law in Israel, Canada, Australia, Hong Kong, India, Indonesia, Mexico, and Russia. Delaware follows a softer approach: while not requiring minority approval, it applies more deferential judicial review to a related-party transaction in which the controller voluntarily gives veto rights to the minority. However, there is scant empirical evidence on whether any form of minority approval works.
