A Game of Power or Discipline: Minority Shareholders’ Activism in China

Abstract

This paper examines 781 proposals sponsored by minority shareholders of Chinese listed companies since the Company Law was revised in 2005, which made proposals more accessible to smaller shareholders. I find that the shareholder structure is essential for minority shareholders to target a company. When the controlling ownership is smaller and minority ownership is relatively larger, a company is more likely to be targeted by minority shareholders’ proposals (MSPs). There is also evidence that minority shareholders target poor performers, but that only happens when the shareholder structure is optimal for minority shareholders to initiate activism. Power, in the form of ownership and identity, dominates the probability of activism behavior. The passage of MSPs heavily depends on whether the proposal is friendly to the management, the identity of the sponsor, and the issues involved. Being targeted by MSPs are often followed by forced top management turnover, but there are no performance improvements in the medium term. Minority shareholders’ activism is more of a game of power.