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Corporate Finance Theory and Practice, Third Edition by Antonio Salvi, Yann Le Fur, Maurizio Dallocchio, Pascal Quiry

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Chapter 40

CHOICE OF CORPORATE STRUCTURE

What a cast of characters!

Section 40.1

SHAREHOLDER STRUCTURE

Our objective in this section is to demonstrate the importance of a company's shareholder structure. While the study of finance generally includes a clear description of why it is important to value a company and its equity, analysis of who owns its shares and how shareholders are organised is often neglected. Yet in practice, this is where investment bankers often look first.

There are several reasons for looking closely at the shareholder base of a company. Firstly, the shareholders theoretically determine the company's strategy, but we must understand who really has power in the company, the shareholders or the managers. You will undoubtedly recognise the mark of “agency theory”. This theory provides a theoretical explanation of shareholder–manager problems.

Secondly, we must know the objectives of the shareholders when they are also the managers. Wealth? Power? Fame? In some cases, the shareholder is also a customer or supplier of the company. In an agricultural cooperative, for example, the shareholders are upstream in the production process. The cooperative company becomes a tool serving the needs of the producers, rather than a profit centre in its own right. This is probably why many agricultural cooperatives are not very profitable.

Lastly, disagreement between shareholders can paralyse a company, particularly a family-owned company.

1/ DEFINITION OF SHAREHOLDER STRUCTURE ...

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