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Minority Shareholder Protection Can Impact Dividend Policy

Seppo Kinkki will defend his doctoral dissertation ”Essays on Minority Protection and Dividend Policy” at the Helsinki School of Economics on Friday, April 4, 2008.

This dissertation covers the impact of minority protection on dividend policy. Majority shareholders as well as company management have the opportunity to take advantage of their position by influencing dividend distribution at the expense of minority shareholders. Legislation can be used to secure the position of minority shareholders. Scandals, such as that of Enron, have proven the necessity of this type of legislation.

In the United States, regulations such as Sarbanes Oxley (2002) seek to improve investor protection. Nonetheless, European Company Law (2001) does not include any common directives on minority protection. Therefore, minority protection has been left to the responsibility of individual countries, either through corporate governance regulations or regulations related to shareholder meetings. Usually in Europe the legislation of different countries grants investors indirect ways of influencing dividend distribution. Finnish Law grants direct influence to minorities. The law states that a preordained minority (1/10) has the right to demand at least half of the company’s profits to be shared, as long as the amount does not exceed 8 percent of their own capital.

The study examines how minority protection, such as the Finnish minority protection model, works in actuality or if the actions of the largest shareholders and company management can in fact paralyze the realization of shareholder protection.

The most central result of the study is that Finnish legislation provides minority shareholders better protection against management than majority shareholder influence. By combining characteristics of American legislation together with minority protection resembling the Finnish model, a legislation could be formed which would protect both the minority and the majority shareholders against company management in cases where management aims to limit dividend distribution.

In finance theory, dividends are believed to possess informational value for a company’s future earnings development. Another pivotal result of the study is that minority protection lessens the potential informational value of dividends. From a legislator’s perspective, minority protection should protect the minority shareholders’ right to decent dividends, but also safeguard the dividend’s informational value. When allocating capital, investors could then invest funds as productively as possible.

Leena Vuorenmaa | alfa
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