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CFA Level I · CFA Level I Exam · Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

A controlling shareholder holds shares with superior voting rights and uses them to approve a related-party transaction at a price favorable to another company he owns. Which risk to minority shareholders does this most likely represent?

This most likely represents expropriation of minority shareholders' value. The controlling shareholder uses superior voting power to move value to another company he owns through a favorable related-party deal, benefiting himself at the expense of minority investors.

  1. ADilution through a rights issue
  2. BExpropriation of minority shareholders' valueCorrect
  3. CReduced liquidity from a share buyback

Explanation

A controlling shareholder using voting power to shift value to himself through a favorable related-party deal is expropriating minority shareholders. The other options describe different events not involved here.

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