TAKING VOTING LEVERAGE AND ANTI-

DIRECTOR RIGHTS MORE SERIOUSLY: A 

CRITICAL ANALYSIS OF THE LAW AND 

FINANCE THEORY 

Sang Yop Kang 

Abstract 

The "Law and Finance theory" - which offers analytical frameworks to measure 

the protection of public investors and the quality of corporate governance­

has dominated the comparative corporate governance scholarship in the last 

decade. So far, many proponents and critics have had debates on the relevance 

of the theory and the implications of the theory's empirical studies. Several 

important points in relation to voting leverage and shareholder protection, 

'Sang Yop Kang is Associate Professor, Peking Unjversity School ofTransnational law; 
J.S.D. (Doctor of the Science of law), Columbia University School of law; Attorney at 
Law; Chartered Financial Analyst (CFA). Professor Kang thanks his mentors at 
Columbia Law School- Professors Merritt Fox, Jeffrey Gordon, Curtis Milhaupt, and 
Katharina Pistor-for their encouragement and advice when he introduced his initial 
ideas of this Article. Professor Kang also thanks Professors Jesse Fried at Harvard law 
School and Ronald Gilson at Stanford and Columbia Law School for their insights and 
critical reviews of the Law and Finance theory in their seminars. Further, Professor 
Kang thdnks Vic.:t: Cham:dlur Jeffrey L.d tiHdU d t Nt:w York University Sh.mghdi, dnt.l 

Professors Francis Snyder, Douglas Levene, Yunlong Man, and Norman Ho at Peking 
University School of Transnational Law, Ching.ping Shao at National Taiwan 
University, and O k-Rial Song at Seoul National University, and Mr. Joon Hyug Chung 
at Shin & Kim, for their comments and discussions. Professor Kang's thanks go to 
participants of a workshop at Peking Unive1sity School of Transnational Law and 
participants o f a conference held by Korean Securities Law Association, In add ition, 
Professor Kang thanks Dean Philip McConnaughay, Vice Dean Stephen Yandle, and his 
colleagues a t Peking University School of Transnational law, Chancellor Wen Hai at 
Peking University Shenzhen Campus. and Pro(~ssors Bok Ki Hong, Sung Tae Kim, and· 
Hyun-Yoon Shin at Yonsei University School or law, for their advice and moral 
support. Also, Professor Kang thanks ed itors of the Columbia Journal of Asian Law for 
their comments, and his students, Tong Ling, Shuping Shao, Yongchen Song, Yulong 
Wang, Tian Xie, Xueying Zhang. Yuhui Zhao, and Xiaozhu Zhong, for their proof­
reading and assistance. Last but not least, Professor Kang thanks his family for their 
endless support for him. 

I 



however, have been highly neglected in these debates. In particular, the 

significance of the one·share·one·vote (OSOV) and the one·share·multiple· 

vote (OSMV) has been inappropriately underestimated. In response, this 

Article explores (1) why OSOV (or OSMV) is a critical component of corporate 

governance; and (2) how OSMV makes some components of the Anti·Director 

Rights Index (ADRI)- perhaps, the most significant corporate governance 

index so far- less meaningful. In addition, this Article offers critical 

examinations on components of ADRI. Features of a controlling shareholder 

regime (including controlling minority structure) are closely examined in the 

context of OSOV/OSMV and the ADRI. To these ends, this Article provides 

examples, explanations, and evidence from China and Korea in addition to 

traditional U.S.·based corporate governance theories. 

I. INTRODUCTION 

Many institutes, relying on indices that they have defined themselves, 

have published reports on matters such as the "competitiveness of nations,"' 

"ranking of U.S. law schools,"' "corruption perception index;' and even 

"survey of happiness across countries."• Likewise, a popular trend in modern 

social sciences is to conduct research on qualitative topics based on indexing 

with quantitative analysis. This academic practice makes ranking possible by 

using scores generated from an index. Recently, such indexing has also been 

' See generally Klaus Schwab, The Global Competitiveness Report 201J·2014, W ORLD ECON. 
FORUM (zO•J), available at 
http://WWWJ. weforum.org/docs/WEF _Gioba1CompetitivenessReport_201J·l4 .pdf; see 
also Michael Porter, The Competitive Advantage of Notions, 68 HARV. Bus. REv. 73 
(1990). 

'See, e.g., Best Law School: Ranked in 2014, U.S. NEWS ANO REPORT, available at 
http://grad ~schools.usnews.ran kingsandreviews.com/best-graduate-schools/ top-law­
schools/law-rankings (last visit~ July 6, 2914). 

See . Corruption Perception Index 201), TRANSPARENCY INr'L, 

http://www.transparency.org/cpi>OIJ/results (last visited July 7, 2014). 

• See Bmer Life Index- Ed. 2014, ORC. FOR ECON. COOP. & OEV., 
http://stats.oecd.org/lndex.aspx?OataSetCode•BLI (last visited July 6, 2014). 

2 



used in comparative corporate governance scholarship. In their pioneering 

a rticle of Law and Finance (t998).' four distinguished economists- La Porta, 

Lopez-de-Silanes, Shleifer, and Vishny (hereafter LLSV)-invented a corporate 

governance index to measure the level of investor protection across forty-nine 

countries.6 

LLSV's framework for analyzing the quality of public investor protection in 

a jurisdiction 7 examines the "one-share·~me-vote" (OSOV) rule and s ix 

components of the "Anti-Director Rights Index" (AORI 8
). 9 One point is 

awarded to a country if it has the OSOV rule, and each component of the 

AORI is worth a point as well; otherwise, zero points are awarded. It is 

noteworthy that the OSOV is a separate ca:egory from the six components of 

ADRI. Thus, the highest ADRI score for a country is six. In addition, it is of 

significance that OSOV· and almost all the AORI components are related to 

' See generally Rafael La Porta et al., Law and Finance, 106 j . Pot. EcoN. 1113 (1998) 
[here inafter LlSV, Law and Finance]. The Law and Finance theory in this Article 
generally refers tO explanations and arguments in LLSV, Law and Finance. 

~ LLSV (or some members of LLSV) wrote a series of articles that are closely related to 
their article of Law and Finance. See, e.g., Rafael La Porta et al., The Economic 
Consequences of Legal Origins, 46 J. Eco". LIT. 285 (20o8); Rafael La Porta e t al., What 
Works in Securit ies Lows?, 61 J. FIN. 1 (2006); Ra!'acl La Porta ec al., Investor Protection 
and Corporate Governance, 58 J. FIN. ECON. 3 (2000); Rafael La Porta et al., The Quality 
of Government, 15 J. L. ECON. & ORG. »> (1999); Rafael La Porta et al .. Legal 
Determinants of External Finance, 52 J. FIN. 1131 (1997) (hereinafter La Porta et al .. Legal 
Determinants!. 
7 For a ranking of countries' corporate governance quality and its availability, see, for 
example, Michael Graff. Law and Finance: Common Low and Civil Urw Countries 
Compared- An Empirical Crictque, 75 E~.:oNOMILI\ 6o, 64 (2.008) ("Therefore, given 
adequate cross-country data, the proposed ranking of countries from different legal 
origins in terms of investor protectjon forms a testable hypothesis."). 
3 The acronym of "AORI" is used by Holger Sparnann. See Holgcr Spa mann, The 
"Antidirector Rights Index" Revisited, 13 REV. FIN. 5TUO. 467 (z010). 

• The six components of ADRI are: (o) "Proxy by Mail Allowed"; (2) "Shares Not Blocked 
Before Meeo ing"; (3) "Cumulative Voting" (or "Proportional Representation"); (4) 
"Oppressed Minorities Mechanism"; (5) "Preemptive Right"; and (6) "Percentage of 
Share Capital to Call an Extraordinary Shareholders' Meeting." See LLSV, Law and 
Finance, supra note 5. at 1127·28. 

3 



shareholders' voting. •• In this sense, the ADRI explores how effectively 

challenging shareholders can rely on voting when they d isagree with directors 

or management." Using the ADRI as their major toolkit (again, the OSOV rule 

is not a component of t he AORI, and OSOV score is not considered when the 

total score of the AORI componems are compared across countries and legal 

origins), LLSV's findings can be sumnlarized as the following: (!} the quality of 

corporate law can be measured by six corporate law provisions as reflected in 

the total ADRI score;" and (2) public investors are protected more in common 

law countries than in civil law countries.'1 

The Law and Finance theory has had a huge impact on comparative 

corporate governance scholarship and policy-making, highlighting the 

im portance of good corporate law that enhances shareholders' protection and 

capital market development." Most of all, without LLSV's seminal project, it 

would be impractical to compare the quality of d ifferent countries' corporate 

governance quantitatively. Indeed, the availability of a quick indicator to 

measure the level of a particular jurisdiction's shareholder protection is a 

blessing for academia. Also, corporate governance scholarship landscape is 

painted more vividly with the statistical analysis of averages, standard 

deviations, !-statistics, confidence levels, and p-values. As a result, it is 

possible to understand numerically how far the quality of corporate 

governance in a developing country lags behind that of a developed country. 

Simply put, corporate governance scholarship has- at least partially­

transformed from an "art" into a "science." Accordingly. economists and 

financial analysts as well as lawyers and legal scholars have actively 

110 Out of the six components of ADRI, only "'Oppressed Minorities Mechanism" is not 
directly related to shareholders' vot ing. See also infra note 92 (explaining that 
"'Oppressed Minorities Mechanism"' can be indirectly related to shareholders' voting). 
11 As for the importance of shareholders' voting, it is worth noting Blasius Indus., Inc. v. 
Atlas Corp., 564 A.2d 65•. 659 (Del. Ch. 19f!8) ("The shareholder franchise is the 
ideological underpinning upon which the lllgitirnacy of directorial power rests."). 

uSee llSV, Law and Finance, supra not.e 5, at llJO·Jl (table 2). 

f.l fd. a[ tu6 . 

'
4 /d. at 1139· 

4 



participated in debates on corporate governance. In addition, the 

transplantation of corporate law from developed countries has been popularly 

pursued, as it is widely believed that the more investor-protection mechanisms 

(e.g., anti-director rights) that exist, the better t he quality of corporate 

governance will be. 

On the other hand, however, the law and Finance theory has been 

challenged. For instance, the statement that the quality of investor protection 

laws determines the capital marke: development (and economic 

developmem)'S has been c•·iticized as possibly being inaccurate in its causal 

d irection. Market development is frequently followed by legal reform, so the 

real direction of causation between law and market might be the opposite of 

what is implied by the Law and Finance theory.'6 Alternatively, it is argued 

that correlation between legal origins and quality of corporate law does not 

necessarily imply causation.'' In addition, one study conducted by Spamann 

points out that LLSV's initial coding for the ADRI of countries is not very 

precise . .a This study casts a. great deal of doubt on the arguments and findings 

of the Law and Finance theory. Another weakness is that important economies 

in transition, such as China and Russia, arc not covered in LLSV's survey.'9 

Furthermore, since law-on-the-book does not necessarily guarantee efficient 

enforcement of such law, it is often argued that the Law and Finance scores­

based on six statutory shareholder rights in corporate law- do not necessarily 

reflect the real level of investor protection. 

15 /d. at 1152. (explain~ng implications of the Law and Finance theory by citing recent 
research). For the classic criticisms of the Law and Finance theory, see infra Part II.C. 

w Cf Simon Deakin et al., An End to Consensus? The Selective Impact of Corporate Low 
Reform on Financial Development l4 (Centre for Bus. Research, Univ. Cambridge. 
Working Paper No. 42.31 2.011), available at http://mpra.ub.uni­
muenchen.de/39047/I/MPRA.,.paper_J9047·pdf ("[L]egal reform is capable of 
stimulating financial g rowth which, in turn, intensifies the process of legal change."). 

"See infra Part II.C. 
18 See Spa mann, supra note 8, at469-70. 

'9 LLSV, L.aw and Finance, supra notes. at 1117 (1"he sample covers forty-nine countries 
frorn Euro~. North and South America, Arrica, Asia, and Australia. There are no 
socialist or 'transition' economies in the sample"). 

5 



As a watershed topic in corporate governance scholarship, the Law and 

Finance theory has been extensively discussed. For example, "causa tion vs. 

correlation" and effects by legal or.igins are recurring issues of debate. This 

Article, however, does not pay attention to these popular {and already 

frequently studied) issues of the Law and Finance theory. Rather, aiming to 

propose new critical perspectives, th is Article analyzes high ly neglected or 

misunderstood factors in the article of Law and Finance, such as the OSOV 

rule and its deviation, control ownership structures, and certain characteristics 

of anti-director rights that could be incompatible with a fair index-score 

system. 

To this end, th is Article explores the unique legal infrastructures and 

market environments of Korea and China, which few studies have researched 

rigorously within the analytical framework of the Law and Finance theory. 

Regarding corporate governance issues, these two countries arc of special 

significance: aside from the recent corporate law reforms that have occurred in 

these two countries, China is the second largest economy in t he world, and 

Korea has long been the development moqel for emerging economies. Also, an 

analysis of the family-oriented corporate groups in Korea {i.e., chaebols) can 

provide a great d eal of legal and economic insight into Chi na, where 

controlling family shareholders have rapidly emerged . In this respect, 

understand ing the current market and legal system in Korea is useful to 

pred ict the future of the Chinese corporate environment. In pa.rticular, 

features related to the prevalent co ntrolling ownership in the two countries 

are to be reviewed. Against this bac'kground, this Article proposes three main 

points to scrutinize the Law and Finance theory. In particular, voting rights, 

voting leverage, the ADRI, and their interaction play a key role in the analysis. 

First, this Article critically examines the OSOV principle and related issues 

in the context of the "controlling minority structure:· (CMS}, •• where a 

dominant shareholder is able to inflate his voting power beyond his economic 

interest. As a fundamental and equal voting principle for all shareholders, 

!o For CMS, see infra 1\0te 90 and accompanying text and infra Pare III.B. 

6 



OSOV should be interpreted as the principle that shareholder voting rights are 

to be commensurate with the amount of thEir equity investment. In this sense, 

it is more appropriate to understand OSOV as "one-dollar-one-vote" (OOOV) 

(or equal voting for one dollar). Under this interpretation, OSOV-and thus 

"one-share-multiple-vote" (OSMV), the exception of OSOV-are ill-defined in 

LLSV's survey. such that only a dual-dass equity structure" is treated as an 

aberration of OSOV. OSMV distorts the equal voting rights in favor of a 

dom inant shareholder; thus, for example, it is possible for one control share to 

have, 10 times· the voting rights that an ordinary share of a minority 

shareholder retains, as seen in a dual-class equity structure. The problem is 

that the practices of stock pyramiding and cross-ownership also grant a 

disproportionately large amount of voting power to a dominant shareholder 

even if he holds a much smaller economic interest. In this respect, such 

schemes are functionally equivalent to dual-class equity structures as voting 

leverage devices. Therefore, all three mechanisms should have been equally 

categorized as corporate insiders' tools deviating from OSOV. In other words, 

at least in some countries, LLSV define OSOV in a broader manner (or, LLSV 

define OSMV in a narrower manner) than they should. 

Second, this Article articulates a.n interlocking effect between OSMV and 

the ADRI not considered by LLSV. As discussed, many ADRI components are 

associated with shareholder voting rights." Moreover, the relevance of ADRI 

components is implicitly based on the assumption of the OSOV principle. This 

is because anti-director rights-if they are closely related to non-controlling 

minority shareholders' voting rights-are meaningful with the notion of equal 

voting power for equal investment. Through voting leverage, however, 

OSOV- the fundamental safety valve for public investors- can be eclipsed by 

OSMV, which favors a controlling shareholder or other corporate insiders. 

With OSMV, accordingly, minority shareholders' statutory power arising from 

anti-director rights would be significantly lessened. 

11 For further explanation of dua1 4 class equity structures, see infra Part lii.B. 

uSee supra note to and accompanying text. 

7 



For this reason, ADRI components which are directly affected by 

OSOV/OSMV can be designed as dependent factors of the enforcement of 

OSOV, meaning that discounting the value of individual anti-dir()ctor rights is 

necessary when OSMY is available in favor of corporate insiders. '3 

Alternatively, the ideal ADRI scoring system needs to take into account 

OSOV/OSMV as well as individual anti-director rights. In their survey, by 

contrast, LLSV treat OSOY and the A DRI as two independent categories and 

count only the ADRI score without consideration of OSOV/OSMV. To 

illustrate, if Country A has 5 anti-director rights with OSMV and Country B 

has 3 rights with OSOV, then LLSV's ADRI scores of the two countries are 5 

and 3, respectively. According to the Law and Finance theory, which is 

predominantly based on the ADRI, the quality of corporate governance in 

Country A is generally explained to be better than that in Country B. This 

Article argues, however, that investor protection is not necessarily better in 

Country A than in Country B, s ince OSMY (and voting leverage) would 

de$troy the value of some voting-related AORI tomponents in Country A to a 

large extent. 

Third, this Article scrutinizes whether LLSY's individual anti-director 

rights are truly proper indicators of investor protection. In particular, four 

AORI componentS-•Cumulative Voting" (or "Proportional Representation"), 

•Preemptive Right," •oppressed Minorities Mechanism," a.nd "Percentage of 

Share Capital to Call an Extraordinary Shareholders' Meeting''-are examined 

in greater depth.,. For example, as discussed later, the eiTectiveness of 

cumulative voting would be ·seriously lessened when the number of directors 

to be elected is small and a staggered board is available. Without considering 

such factors, LLSY mechanically award countries one point as long as 

cumulative voting is allowed in their corporate law.'' ln addition, the 

J) For further explanation. see infra notes 139·140 and accompanying text. 

"See infra Part IY. 
1s llSV, Law and Finance, supra not~ >• at 1122 (lablc 1). For further explanation on the 
variable of .. Cumulative Voting" (or .. Proportional Representation") and criticism, see 
infra Part IY.A. 

8 



aforementioned cascade effect of the deviation from OSOV on anti-director 

rights is further explored at the level of the individual AORl components. For 

instance, when OSOV is circumvented, a cumulative voting system- the 

mechanism designed to foment public investors' proportional representation 

in a board-would be less meaningful. This is because an ingrained feature of 

the disproportionate voting scheme of OSMV (or voting leverage) already 

damages minorities' equal voting before minorities use cumulative voting. 

The remainder of this Article proceeds as follows. Part ll describes the Law 

and Finance theory in general and classic criticism of the index. Further 

criticism by the Au thor is proposed as "ell. Part Ill proposes the Author's 

perspective on LLSV's ill-defined notions of OSOV and OSMV. Subsequently, 

incorrect applicat ions of such notions are discussed in greater depth. In 

addition, the effect of combining OSOV /OSMV and the AORJ is introduced. 

Part IV analyzes why individual ADRI components are incomplete and 

distortive, and how the ADRI could mislead policymakers who are interested 

in improving the corporate governance of a jurisdiction. Part IV also explores 

how the effectiveness of individual ADRI components could be damaged by 

OSMV and CM$.'6 Part V provides a summary and conclusion. 

I ndexing~ a popular trend in many studies, is quite useful since it 

quantifies the qualiry of important information and provides a practical 

summary. Nonetheless, indexing is merely a means of conducting a quick 

litmus test. In order to properly interpret such quick tests, a careful qualitative 

analysis and a critical review of an index'; components are essential. In this 

respect, this Article also provides a guideline to understand and examine 

index-oriented studies. For instance, law school "ranking" as well as the 

"independence"' of central banks can be rc-cxa.mincd, not to mention other 

16 In terms of its impact on the quality of corporate governance, CMS is generally 
associated with a negative connotation. It is worth noting, however, that some 
jurisdictions based on CMS have possibly better corporate governance systems than we 
may have thought. See generally Sang Yop Ka1\&, Re-envisioning the Controlling 
Shareholder Regime: Why Controlling Shareholders and Minority Shareholders Often 
Embrace, 16 U. PA. J. Bus. L. 843 (2014); Sang Yop Kong, ·cenerous Thieves": The Puzzle 
of Controlling Shareholder Arrangements in Bod-Law jurisdictions, (Soc. Sci. Research 
Network, 2013), available at http://ssrn.com/abstract_id• 2J05645· 

9 



corporate governance indices (e.g., those by Gompers et al.,'' Bebchuk et al.,'" 

and Djankov et al.'9). 

II. LAW AND fiNANCE 

Since its publication in the late 19905, the Law and finance theory has 

perhaps been the most influential and controversial topic in the field of 

corporate governance. Indeed, comparative corporate governance scholarship 

can be divided into two eras: "before Law and Finance" and "after Law and 

finance.· This Part sketches the theory and core concepts of OSOV, OSMV, 

and the six components of the ADRI. Subsequently, this Part explains classic 

critical views of the theory followed by further critiques by the Author. 

A. The One·Share·One·Vote Principle and the Anti-Director Rights 

Index 

"Does being a shareholder in France give an investor the same privileges as 

being a shareholder in the United States, India, or Mexico?":JO Comparative 

corporate governance scholars have long sought the answers to such questions. 

To put forward at least a partial answer, LLSV constructed an index to measure 

the extent to which the corporate law (or commercial code) of a jurisdiction 

protects public shareholders in that domain. for an international comparison 

of the quality of shareholder protection, LLSV first surveyed OSOV/OSMV and 

then the ADRI with six components across forty-nine countries. 

OSOV is the rule that provides shareholders-regardless of whether they 

are corporate insiders or not- with voting rights proportional to the amount 

of their equity investment. In this sense, although OSOV literally means equal 

)7 See generally Paul Gompers et al., Corporate Governance and Equity Prices, uS Q. J. 
ECON. 107 (2003). 

18 See generally Lucian Bebchuk et al., What Matters in Corporate Governance?, 22 REV. 
f iN. STUD. 783 (2009). 

"'See generally Simeon Djankov et al., The Law and Economic$ ofSelfOealing, 88 ). FIN. 
ECON. 430 (>oo8). 

30 See LLSV, Law and Finance, supra note 5. at m4. 

10 



voting rights for any "share," it should be construed as equal voting for any 

"dollar." In contrast, OSMV is designed to award disproportionately more 

voting power to a dominant shareholder or other corporate insiders. Under 

OSOV, an insurgent shareholder can become a dominant shareholder by 

either purchasing a majority of shares in the market or obtaining a majority of 

votes from other shareholders through a proxy fight. In contrast, under OSMV, 

it would be much more difficult (or simply impractical) for an insurgent to 

become a new dominant shareholder. Even if the insurgent holds more than 

50% of cash flow rights, that does not necessarily enable the insurgent to 

exercise more than 50% of votes due to the voting value disparity between a 

challenger's shares and a controller's shares. In sum, while cash flow rights (or 

economic interests) and voting rights are generally aligned under osov." 
they are not exactly aligned under a legal system where OSMV is allowed. 

Separately from OSOV, the anti-d irector rights defined by LLSV- i.e., 

individ ual components of the AORI- are a group of rights in corporate law (or 

.a commercial code) awarded to public shareholder& when opposing 

management and a board of directors. More specifically, they are six 

independent statutory rights for public shareholders: (•) whether shareholders' 

pro>-y voting by mail is legally permissible (in LLSV's terminology, "Proxy by 

Mail Allowed");" (2) whether corporate law "does not a llow companies to 

require shareholders to deposit their shares prior to a general shareholders 

meeting" ("Shares Not Blocked Before Meeting");33 (3) whether corporate law 

allows minority shareholders to have proportional representation in a board of 

directors ("Cumulative Voting• or "Proportional Representation");" (4) 

whether public shareholders are able to bring suit against management and 

directors or to rely on appraisal rights under corporate law ("Oppressed 

P See, e.g., Sanford J. Grossman & Oliver 0 . Harl, One Shore-One Vote ond the Market 
for Corporate Control, >0 j . FIN. ECON. 175, 175 (1988) (" ..• (A) II securities have votes in 
the same proportion as their claim to income."). 

P LL.SV, Low and Finance, supra notes. at 11n (table 1). 

)) ld. 

,. /d. 

11 



Minorities Mechanism");"' (5) whether corporate law grants shareholders a 

right to purchase newly issued shares on a proportional basis (•Preemptive 

Right")! and (6) whether less than to% of minority shareholders arc allowed 

to call a special shareholder meeting under corporate law ("Percentage of 

Share Capital to Call an Extraordinary Shareholders' Meeting")." 

This Article calls the combination of OSOV/OSMV and the ADRI the 

·Macr.o Corporate Governance Index• (MCGI) since components of MCGI 

describe the qual ity of a country's corporate governance a t the macro level. In 

the Law and Finance account, when a country's corporate law contains one of 

these "one plus six" components of the MCGI (the OSOV rule and s ix ADRI 

components), the country receives one point. Otherwise, zero points are 

awarded.>" Viewed in this light, LLSV's scoring policy of OSOV and the ADRI 

is based on a simple binary number system of "o" or "t" (thus, a point value in 

between, such as 0.5, does not exist}. Additionally, it is noteworthy that LLSV 

set the variable of OSOV (i.e., whether a country has OSOV or OSMV) aside 

from the six components of the AORI, although there is little reason for such 

segregation. 39 Then, LLSV constructed a h uge scoreboard for the ADRI of 

forty-nine cou ntries, excluding scores for OSOV. Since the ADRI has six 

components, each country's total ADRI score can range from o · to 6. In this 

respect, the core part of the Law and Finance theory is indeed the ADR I s ince 

it compares countries' AORI scores, rather than scores of a broader index that 

includes the OSOV variable. For example, while the average ADRI score of 

forty-nine countries is 3, the score of the United States is 5.•• The only anti-

"/d. 

)6 /d. at u23 (table 1). 

"ld. 

)& /d. at 1122-23 (table 1) . 

" For a further analysis of OSOV /OSMV and its related issues, see infra Part Ill. 
40 However, Spamann points out that LLSVs coding is seriously flawed, and the 
''corN..-'Cted AORI" score of the United States is 2 . Spamann. supra note 8, at 474· 

12 



director right that the U.S. corporate law lacks is the preemptive right.4
' Table 

1 below summarizes the MCGl and describes its application in the United 

States under LLSV's original coding. 

Table" MCGI (OSOV and ADRI) 

Sror~ ofthP 
Macro Corporate Governance In dex (MCGI) 

United States 

1. One-Share-One-Vote (OSOV) Rule 0 

(t) Proxy by Mail Allowed I 

(>)Shares Not Blocked Before Meeting I 

(3) Cumulative Voting or Proportional 
I 

2. Anti~Director 
Representation 

(4) Oppressed Minorities Mechanism 1 
Rights Index 

(5) Preemptive Right 0 
(ADRI) 

(6) Percentage of Share Capital to Call 
I 

an Extraordinary Shareholders" Meeting 

Total Score of U.S. Anti-Director 

Right (Maximum 6 Points) 
5 

B. Implications of the Law and Finance Theory and Its 

Contributions 

After surveying the ADRI of forty-nbe countries, LLSV used the ADRI 

score-but not the OSOV score- of each countty as a proxy for the country's 

level of corporate governance. Put differently, the quality of each of the forty­

nine countries" corporate governance is roughly quantified by the individual 

4
' As for preemptive right, "(t)he common law concept of preemptive rights sought to 

protect existing shareholders from dilutior. of their stock ownership through 
subsequent stock offerings to a few existing shareholders or to new ones." T"rOM.AS LtE 
HAZ£N & W. MARKHAM, CORPORATIONS AND 0T>JER BUSINESS [NT£RPRIS£S: CASES AND 

MATERIALS 14~4 ()rd ed. 2.009). However, the common law rule of preemptive right 
could be limited by statute. "Delaware, for example, denies preemptive rights unless 
they are specified in the certificate of incorporation. Del. Corp. §10>(b)(3)." /d. at '433· 

13 



countries' aggregate ADRI scores."' Naturally, it is likely to conclude that, for 

example, a country with 5 points on the ADRI (e.g .• the United States and the 

Unit~d Kingdom) protects public shareholders better than a country having 1 

points (e.g.. Ecuador, Egypt, Greece, Austria, Korea, Switzerland). 41 

Accordingly, it is possible- if not sufficiently sophisticated- to rank forty-nine 

countries in terms of the quality of their corporate governance. 

Then, LLSV sorted out the forty-nine countries according to their legal 

origins (based on common law vs. civil law). After classification, the number of 

jurisdictions with common Jaw, French civil Jaw, German civil law, and 

Scandinavian civil law were found to be 18, 21, 6, and 4, respectively. 

Subsequently, the average ADRI scores for each group of legal families were 

calculated. Since the vast majority of countries belong to either common law 

family or French civil law family, in practice LLSV's comparison was conducted 

based on the rivalry framework of "Anglo-American tradition vs. French 

tradition." Specifically, while the average ADRI score of countries with 

common law origin is 4. the average ADRI score of countries with French civil 

law origin is 2.33.44 Relying on further statistical analysis (including standard 

deviation and !·statistics). LLSV argue that public investors in capital markets 

are protected the most in common law jurisdictions and the least in French 

civil law jurisdictions•• Such a difference of average scores between common 

law and French civil law is supported further since it is statistically 

signifocant.46 In addition, the theory implies that the development of capital 

42 Although scores of countries are calculated, the majn point of the Law and Finance 
theory is the superiority of common law jurisdictions over civil law jurisdictions in 
terms of the level of investor protec-tion. In other words, it seems that comparison 
among "groups of countries"- rather than among .. countries .. - is emphasized in the 
theory. 
43 For the AORI score of each country, see LLSV, Law and Finance, supra note 5. atn3o~ 
31 (table>). 

44 Jd. at 1119-32. 

4
) ld . at m6. 

46 /d. at 1131. The average AORI scores of six German civil law countries and four 
Scandinaviim civil law countries are 2.33 and 3 points respectively. 

14 



markets as well as the quality of corporate law and governance in each 

jurisdiction are affected by legal origins47 

Since the late 1990s, the Law and Finance theory has brought 

revolutionary development to corporate governance scholarship as a fully 

interdisciplinary subject of law, economics, and finance. Based on LLSV's 

endeavor to pursue statistical analysis. corporate governance scholars have 

constructed and modified academic methodologies to evaluate the 

comparative advantages of one jurisdiction over another. Now, the artistic 

nature of corporate governance becomes more scientific because the quality of 

corporate governance measured by the ADRI can be quantified, compared, 

and ranked across countries. 

Another contribution of LLSV is expanding the scope of comparative 

corporate governance scholarship. Before LLSV's seminal project, most 

corporate governance scholars-either in law or economics departments­

predominantly paid attention to the United States. To a much lesser degree, 

the corporate governance of Japan and Germany- the S<:cond and third largest 

economies at the time-was studied as an alternative model. As for German 

corporate governance, commentators were interested in a two~tier board 

system, which differs from the single-tier board system of the United States.'" 

As for Japanese corporate governance, a group of scholars was interested in 

Japan's distinctive systems (e.g., keiretsu corporate group system}, executives' 

long-term view of management, lack of M&A,'9 life-long employment.'" and 

corporate policies aiming at the welfare of other constituencies (e.g., 

•
7 Ste LLSV, Low and Finance, supra note 5, at 111), H52. 

48 Je •Ot:fl Wt:iflatr & jOOSl C. Paytt, A Tu.x.uuumy u[Syst~IWi u[Cu•puru(~ Guvc-mum:c:-, ·1 
CORP. Gov.: AN II<T'L Rrv. 15>, 157 (1999) ("b Germany, the board comprises a 
management board (Vorstand) and a supervisory board (Aufsichtsrat), which provides 
a complete separation between management and supervision of management."). 

49 For more t"xplanation of the lack of M&A activity in Japan, see generally Curtis J. 
Milhaupt, Creative Norm Destruction: The Evolution of Nonlegal Rules in ]ap4nese 
Corporate Governance, 149 U. PA. L. REV. 2083 (2001). 

50 See, e.g., Ronald j. Gilson & Mark j. Roe, Lifetime Employment: Labor Peace and the 
Evolution of japanese Corporate Governance, 99 COLUM. L. REV. so8 (1999) (providing 
general explanation on life-long employment in Japan). 

15 



employees)5' in contrast to the American shareholder primacy norm.5' By 

examining the corporate governance of forty-nine economics, including 

developing as well as developed countries, however. LLSV overcame this ill· 

balanced tendency in academia and set a new milestone in comparative 

corporate governance scholarship. 

Furthermore, LLSV's study has fomented a trend of the "scientification of 

the art" in corporate governance a t the firm level as well as the country level. 

Djankov et al. constructed the "Anti Self-Dealing Index." another macro 

corporate governance index measuring how well a jurisdiction protects 

minority shareholders from a dominant shareholder's expropriation of 

corporate value.53 The World Bank conducted a "Doing Business" project" 

which assesses how friendly a jurisdiction's legal system is to business 

communities. In addition, Gompers et al. built a corporate governance index 

at the firm level. 55 Bebchuk et al. developed a management-entrenched index 

as well. 56 

5' For academic artides on Japanese corporate governance, see generally Ronald J. 
Gilson & Mark J. Roe, Understanding the japanese Keiretsu: Overlaps Between Corporate 
Governance ond Industrial Organization, 102 YALE L.J. 871 (1993); Ronald ]. Gilson & 
Curtis J. Milhaupt, Choice as Regulatory Reform: The Case of japanese Corporate 
Governance, 53 AM. J. COMP. L. 343 (2005). 

51 Shareholder primacy refers to the principle that shareholders' interest should be 
placed as the most significant issue in corporations. According to shareholder primacy, 
directors and officers of a corporation are required to discharge duty of loyalty to 
shareholders (not another constituency of a corporation such as creditors and 
employees). See, e.g., Dodge v. Ford Motor Co. 204 Mich. 459, 170 N.W. 668 (!919). For 
a critical review of this case, see generaHy Lynn A. Stout, Why We Should Stop TeacMng 
Dodge v. Ford, 3 VA. L. & BUS. REV. 163 (20o8). 

53 See generally Djankov et al., supra no'te 19. 

54 • saS<!d in signifocant part on LLSV's methodology for quantifying law, one strand of 
rule of Jaw projects that is still emerging is the World Bank's Doing Business Initiative, 
begun in 2.004." Ruth V. Aguilera & Cyothia A. Williams, .. Law and Finance": Inaccurate. 
Incomplete, and Important, 2009 BYU L. REV. 1413, 1426 (2009) (relying on Kevin E. 
Davis & Michael B. Kruse, Taking the Measure of Law: The Case of the Doing Business 
Project, 32 L. & SOC. INQUIRY 1095 (2007)). 

''See generally Gompers et al., supra note 27. 
56 Their entrenchment index is based o.n six provisions, such as staggered boards, limits 
to shareholder bylaw amendments, poJson pills, golden parachutes, and supermajority 
requirements for mergers and charter amendments. See Bebchuk et al., supra note 18. 

16 



C. Criticism o f t he Law and Fina nce Theory: Overview and Furthe r 

Ana lysis 

Despite LLSV's contributions to the corporate governance scholarship, 

many of their key arguments have been called into question. When simplified, 

the key argument of the Law and Finance school is that legal origin 

determines the qualiry of corporate law, which in turn determines economic 

outcomes such as capital market development. 57 However, as Pistor points out, 

logical development of the Law and Finance theory is not fully justified.58 This 

Section explains other critical views as well. 

1. Correlation and Causation 

Another important topic of discussion is the issue of whether LLSY's 

empirical study demonstrates correlation or caus.11ion. The idea behind th is 

criticism is that correlation does not necessarily mean causation.~ and LLSV 

showed merely a statistical correlation ~tween legal origin, the qualiry of 

corporate law. and economic outcomes rather than links of causation between 

these variables. As for this "correlation vs. causation• debate, West conducted 

an intriguing and appealing project. In his paper, West points out that a 

country with a French civil law (English common law) system is more (less) 

likely to succeecl in the FIFA Wodd Cup.00 In the last four decades, the FIFA 

n See generally LLSV, Law and Finance, supra note 5· As for LLSV's key argument, see 
Katharina Pistor, Rethinking the Law and Finance Paradigm, >009 BYU L. REV. 1647,1656 
(2.009) ("In their anniversary paper, LLS depict the relation between origin, Legal rules, 
and economic outcomes in a flow chart that leads from 'Legal Origin' to 'Legal 
lnstitutiOI1S' to economic 'Outcomes.""). 

58 See. e.g., Pislor, supra no1c 57, at 1650 (''The leap from a micro-level issue-the 
f'inanci~g of firms- to the macro-level issue-financial market development- is 
as~rted, but not explained."). 

59 See, e.g. , john C. Coffee. Jr.; Do Norms Matter? A Crass-Country Evaluation, 149 U. PA. 
1... REv. 2151, 2154 (zooo) ("Yet, although LLS&V have unquestionably shown • 
statistically significant correlation between strong capital markets and certain specific 
legal protections that tend to characterize common law legal systems, correlation does 
not prove causation."). 

6o See Mark D. West, Legal Determinant of World Cup Success 3 (Univ. Mich. John M. 
Olin Center. for Law & Econ., Working Paper No. o~-009, lOO:t), available at 
http://ssrn.com/ abstract• 318940. 

17 



World Cup championship was won by Germany (1974), Argentina (1978), Italy 

(1982), Argentina (1986), Germarw (1990), Brazil (1994), France (1998}, Brazil 

(1001), Italy (2006), Spain (2010) and Germany (1014).6
' All of these countries, 

with the exception of Germany, are countries with legal origins in French civil 

law. More broadly, in the context of the "common law vs. civil law• debate, the 

performance of common law countries is much worse than that of civil law 

(including German civil law as well as French civil law countries). In fact, 

although time series data have expanded, the finding is almost the same: since 

the first FIFA World Cup in 1930, the only country with a common law system 

to win the championship was England in 1966, and this happened only once 

when the game took place in the United Kingdom.6' 

It is difficult, however, to say that countries with a French civil law system 

perform better in soccer "due to the remaining vestiges of the Napoleonic 

Code.'.6> Put differently, legal origin-although correlated with the success of 

national teams in the World Cup-does not determine championship or rank 

in the World Cup. The logic may continue: just as the "quality of soccer 

playing" is not caused by legal origins, it is probable that the "quality of 

corporate governance" is not caused by legal origins 6
' Of course, it would be 

fair to say that the relationship between corporate law based on a legal origin 

and market development is more likely to have causality than the relationship 

between a legal origin and a national soccer team's performance. Thus, it 

seems that the soccer paradox in relation to legal origins does not necessarily 

fully refute LLSV's empirical study. Nonetheless, West's study is suggestive 

and worth noting as it raises the question of causation in LLSV's project. 

6' Originally, West conducted his research based on countries' ranking in International 
Federation of Association Football (FIFA). See id. at 1 ("In my regressions, I focus on 
soccer, using as the dependent variable the number of points each country has in the 
FIFA/Coca-Cola World Ranking as of May 2002."). This Article, however, uses 
championship data from the FIFA World Cup. 
6

' Even during the FIFA World Cup in •966, England's score (against West Germany) 
during overtime was controversial 

6
J West, supra note 6o, at 4· 

6./d. 

18 



Even if a causal relationship is found in the Law and Finance theory, the 

direction of causation is sti ll unclear and subject to further discussion. As 

Pistor explains, ". . . law typically lags market development. Thus, better 

investor protections tend to be a response to market.'"65 That is, the extent of 

market development is not determined by the quality of corporate law. Rather, 

the direction of causality between law and market development could be 

reversed, as opposed to the finding of the Law and Finance account. 66 

Alternatively, it is possible that there is no one-way influence and causation, 

so that good corporate law enhances the quality of a capital market in a 

certain country and that the more sophisticated domestic capital market 

further develops macro-level corporate governance and corporate law in the 

country.67 

2. Legal Origin 

The Law and Finance account is based on the notion that countries with 

common Jaw differ from those with civil law in terms of the quality or their 

corporate governance.68 1n order to support this finding, it is necessary to first 

clearly distinguish between the concepts of common law and civil law. 

Othel'wise, it would be difficult to ascribe legal origin to the different levels of 

investor protection. According to LLSV, common law, which is shaped by 

precedents from judicial decisions, is distinctive from civil law: "English law is 

6s Pislor, supra note 57· at •651; see also Stephen J. Choi, Law, Financt, and Path 
Dependence: Developing Strong Securities Markets, 8o TEX. L. REV. 1657. 1680 (2001) 
{"The LlSV and related studies demonstrate a significant relationship between stronger 
legal protections for minority shareholders and creditors and the size of the external 
capital markets, the absence of controlling shareholders, higher dividend payments, 
increased valuation, and reduced private benefits .of control. However, what remains 
somewhat unclear is the causality of the relationship. For example, it may be possible 
that a greater level of financial development (and rhe corresponding larger population 
of investors) may actually cause the enactment of laws providing for stronger investor 
protections."). 

66 See Milhaupt, supra note 49, at un-13 ("· . . . the e mpiricists may have reversed the 
actual chain of causation between law and corporate governance."), 

67 See e.g., Deakin et al., supra note 16, at 24. 
68 La Porta et al., Legal Determinants, supra note 6, at 1131. 

19 



common law, made by judges and subsequently incorporated into legislature. 

French, German, and Scandinavia" laws, in contrast, are part of the schola r 

and legislator-made civil law tradition, which dates back to Roman law."~ 

LLSV emphasize that, in particular, the civil law tradition "uses statutes and 

comprehensive codes as a primary means of ordering legal material."70 The 

problem, however, is that no cle·ar line exists between legal families. For 

instance, United States is a common law jurisdiction relying o n corporate case 

law developed by Delaware courts. Nonetheless, it is often explained that the 

United States is also heavily dependent upon regulations and other statutory 

codes enacted by Congress and the SEC as well as the Securities Acts of 1933 

and 1934· 

Similarly, in a country of civil law origin, the role of courts to interpret law 

and regulations is more significant than may have been generally thought. In 

such a country, it is true that written law is passed by legislature and rules a re 

enacted by government agencies. Accordingly, the judiciary is not a main 

player during the ini tial law-making process. However, such statu tory codes 

are usually condensed. This is done partially because lawmakers are unable to 

anticipate and write every detail of potential issues in the laws and regu lations. 

In addition, a legislature often leaves statutes and rules open (incomplete) on 

purpose in order to accommodate the evolution of society. Functionally, in 

this sense, the judiciary is (and should be) involved in the law-making process 

by clarifying law and rules in concrete cases. 

Civil law codes also use many general terms that are not easily defined. 

For example, to name several , legal terms such as "fairness," "just 

compensation," "(utmost) good faith," "equal (or equity)," "discriminatory," 

"normal," "ordinary," and "public orders and good morals" usually appear in 

statutes. Such general terms, which often shape key issues in lawsuits, 

ultimately need to be interpreted by the judiciary. As a result, civil law judges 

., /d. (citation omitted). 

,. ~1,$\1. LQw ~M f inonr¢, $Upr~ RQt¢ s. a! Ill{! (~iting)QHN H. M~RRYMAN, TH~ C!V!~ i,.AW 
TRADITION: AN INTRODUCTION TO THE LEGAL SYSTEMS OF WESTERN EUROPE AND lAT IN 

AM ERICA (ost ed. 1969)). 

20 



do not mechanically, without discretionary authority, declare and apply 

statutory laws and rules enacted by a legisl~ture. Indeed, the role and power of 

judges are significant and strong in many civil law jurisdictions. In addition, as 

LLSV explain, the civil law tradition often "relies heavily on legal scholars to 

ascertain and formulate its rules."" However, this is not always true. Also, 

since there is not one unified view among scholars in regard to complicated 

legal issues, it is ultimately a judge who determines which scholar's view will 

be applied as a legal rule in a particular case. 

Whereas the classification of gender is mutually exclusive at a genetic 

level, there is a high chance of a hybrid classification of legal families. For 

example, according to USV's classification, the modern Japanese legal system 

follows German civil law tradition. More precisely, however, Japan relied on 

the combination of the French and German civil law systems in the 19<1> 

century (and the early 1o'h century)." After the Second World War, Japan 

heavily adopted legal doctrines from the United States,n particularly in the 

area of corporate law .'4 Recently. such a trend became more pronounced as 

japan legally recognized the U.S.·style poison pill in hostile takeover defenses75 

and adopted a Unocal-based doctrine.76 

71 /d. 

"See, e.g., ). Mark Ramseyer, Mixing-and-Mauhing across (Legal) Family Lines, 2009 
BYU L. REV. 1701, 1708· 11 (2009). 

13 /d. at 1708 (citing Curt is J. Milhaupt, Historical Pathways of Reform: Foreign Law 
Transplants and japanese Corporate Governance. in CORPORATE GOVERNANCE IN CONTEXT: 

CORPORATIONS, STATES, AND MARKETS IN EUROPE, jAPAN, AND THE US 53. 55 (Klaus j. Hopt 
et al. eds., 2005)). 
74 H ideki Kanda & Curtis J. Milhaupt, Re-examining Legal Transplants: The Director's 
Fiduciary Duty in japanese Corporate Law, 51 AM. j. COMP. L 887, 887 (woJ) ("Japan 
imvort~<.l iLs origindl Conuu~rddl Cud~ (induUiug lc:gdl rul~ uu IJusin~ss t:uryurdliuus) 
from Germany in 1898 as part of a fundamental reform of iLS legal system, and made 
large~scale amendments to the corporate law in the immediate post·war period by 
importing many specific legal rules frorn the United States: ). 

" See generally Jack B. jacobs, Implementing japan's New Anti· Takeover Defense 
Guidelines-Part f: Some Lesson,'i from Delowa1e's Experience ;n Crafting Fair Takeover 
Rules, > N.Y.U. j. L. & Bus. J>) (>oo6) (explaining japan's new approach to adopt the 
U.S.-soyle oakeovcr docorines). 

76 Unocal Corp. v. Mesa Peoroleum Co., 493 A.ul 946 (Del. •?85) (proposing the Uncx:al 
test for takeover defense cases). 

21 



Korea, another German civil law country, has also shown a trend towards 

Americanization. Lately, judges, prosecutors, lawyers, and scholars have tried 

to apply U.S. jurisprudence and doctrine, even in the fields of public law (e.g., 

constitution and criminal law) that are most inOuenced by German civil law. 

In regard to corporate law in particular, cases and theories in the United States 

play a significant role in guiding legal doctrine and practice in Korea. Also, 

French civil law tradition has inOue:nce on legal scholarship in Korea, at least 

to some extent. In short, the experiences of Japan and Korea tell us that it is 

difficult to use legal families as dummy variables in a straightforward manner, 

as was done by the Law and Finance theory. 

Given this possibility of a complex hybrid, it would be fair to say that 

Japan and Korea are characterized by X% German civi l law, Y% French civil 

law, and Z% common law, as opposed to the simple dichotomy proposed by 

LLSV. Of course, problems when acknowledging a hybrid of legal origins 

include the following: (t) it is impractical to recognize the precise fraction of X, 

Y, and Z; (z) even if X, Y, and Z are recognized in each country, they differ in 

different fields of law (e.g., the influence of legal origins on corporate law 

could be different from that on other laws); (J) even worse, X, Y and Z may 

change over time. 

3· Other Considerations 

Another criticism of the Law and Finance theory is related to LLSV's 

limited coverage of more particularized areas of law. One important area that 

has been omitted is rules on M&A. 77 The United States and the United 

Kingdom are similar in that they share diffused shareholder ownership78 in 

77 LLSV, Law and Finance, supra note 5· at 1120. See also Amir N. Licht et al., Culture, 
Law, and Finance: Cultural Dimensions of Corporate CoYernance Laws 21 (Law and Econ. 
Workshop, U.C. Berkeley, 2001) ("LLSV acknowledge some of the possible objections, 
including the f-act that the indices do not cover merger and takeover rules, that they 
CO\'Cr di!iclo!iurc rule& only partially, Jnd that thC}' do not cover rules made by &tock 
exchanges or regulations of financial institutions:') (citing LlSV, Law and Finance, 
supra note 5), available at http:l/cscholarship.org/uc/itcm/s3P3v8k7. 

78 See, e.g., John C. Coffee, Jr .. The Future as History: The Prospects for Global 
Convergence in Corporate Governance and Its Implications, 93 Nw. U. L. Rtv. 641, 641~42. 

22 



public corporations and a relatively common goal of shareholder primacy.'9 

They differ quite markedly, however, in their distinctive M&A rules. For 

instance, the mandatory bid rule, which has been the principle in the United 

Kingdom, is not found in Delaware. If different M&A rules were considered in 

LLSV's data set, the extent to which commonali ties are observed between the 

two leading common law countries would be attenuated. Excluding M&A rules 

would help provide LLSV with a more robust conclusion that common law 

countries as a group differ from civil law countries. 

Suppose that legal origin is the dispositive factor that determines the 

development of capital markets in countries, as the law and Finance theory 

implies. Then, one intriguing interpretation among scholars is that when a 

certain jurisdiction was forced to adopt French civil law a few hundred years 

ago due to colonizations., their economic destiny was determined to be 

forever hopeless in terms of investor protection and capital market 

development. In fact, what the law and Finance account provides is not time 

series analysis but only cross-sectional analysis. If time series a nalysis was 

conducted, some Ouctuation in terms of how investors have been protected in 

countries over the time might be observed. For instance, it is explained that 

the French capital market was more developed than the U.S. capital market at 

the start of the 1o'h century.8' 

Moreover, as is often discussed, it is unclear whether the six components 

of the ADRI that LLSV chose are representative of good corporate law. As 

Coffee explains. "(b]y no means is it here implied that these rights (in ADRI] 

(1999) (explaining dispersed ownership. the "sep .. ation of ownership and control," and 
the controlli ng shareholder system). 

19 for more on sh~rcholdcr pdmocy, sec supra note 52.. 

8o LLSV, Law and Finance, supra note 5. at 1126 ("CounLries typically adopted their legal 
systems involuntarily (through conquest or colonization)."). 

"See, e.g .. Raghuram G. Rajan & Luigi Zingale•. The Great Reversals: The Politics of 
Financial Development in the Twentieth Century, 69). FIN. EcoN. 5· 7 (2003) ("In '9'3• 
France's stock market capitalization (as a fraction of GOP) was almost twice that of the 
Uniled States (0.78 vs. 0.39) even !hough the Freoch Civil Code has never been friendly 
to investors . By 198o. roles had reversed dramatrcally. France's capitaliz.ation was now 
ba rely one-fourth the capitalization in the United States (0.09 vs. 0.46). And in •999. 
the two countries seem to be converging (1.17 vs. 1.52).") (citations omitted). 

23 



are unimportant, but they seem to supply only partial and sometimes easily 

outflanked safeguards, which have little to do with the protection of control 

and the entitlement to a control premium."8
' In addition, the number of 

components that was chosen for the AORI bears scrutiny. For practical 

purposes, it is understandable that collecting data for six components was 

already burdensome when LLSV examined the corporate law of forty-nine 

countries. Nonetheless, that does not justify the decision for the index to have 

six components to measure the quality of corporate governance across 

countries (as often criticized, for example, why not ten components?). 

Furthermore, it is questionable why the six components of the AORI are 

equally weighted (i.e., the score of each component is always 1 point)83 A 

related matter is that it is probable that a component's weights will vary from 

country to country. For instance, when the corporate governance role of 

cumulative voting in Country A is more significant than that in Country B, the 

weight of cumulative voting in Country A's AORI should be larger than that in 

Country B. 

Among the remarkable criticisms against LLSV's Law and Finance theory 

is Spamann's finding of the coding errors of LLSV's.original AORI. "A thorough 

reexamination of the legal data, however, leads to corrections for thirty-three 

of the forty-six countries analyzed." .. Then, he adds, "[t]he correlation 

between the corrected and the original AORI is only 0.53."8s Indeed, such 

coding errors by LLSV are understandable to some extent since LLSV's work is 

a path-finding project and is among the forst attempts to analyze and compare 

the corporate law of many countries. Although the enormity of LLSV's 

contributions should not be downplayed, Spamann's criticism is crucial. 

Under his corrected AORI, three claims- upon which traditional corporate 

"john C. Coffee, Jr., The Rise of Disper$ed Ownership: The Roles of Law and the State in 
che Separacion of Ownership and Concrol, mY 1\1.6 !.). t, 4 n,6 (~oot) . 

83 For example, students in my course also raise 1his question. 
84 Spamann, supra note 8, at 468 . 

., ld. at 470. 

24 



governance scholarship relies heavily- are not firmly supporte<l : 86 
( •) 

"common law countries oiTer greater investor protection than civil law 

countriesl}: 87 (2) "greater investor protection is associated with lower 

ownership concentration and larger equity markets";88 and (3) "poor investor 

protection exacerbated the Asian financial crisis of 1997·""" 

Ill. CRITICISM OF LLSV's ANALYSIS OF ONE-SHARE-ONE-VOTE 

OSOV is one of the most vital protective mechanisms for minority 

shareholders. LLSV considered it as a componenr of a large set of MCGl that 

they surveyed across forty-nine countries; however, there are several 

vulnerable aspects of LLSV's analysis. In pcrticular, the failure to address CMS 

where a dominant shareholder exercises control via a majority of voting power 

while he holds only a fraction of shares is a crucial error.90 ln addition, LLSV 

d id not include OSOV in the AORI. Thus, the OSOV score is not counted 

when comparing the level of investor protection among countries or legal 

origins. In this respect, the significance of OSOV (or the deviation from OSOV) 

affecting the efficiency of AORI components has been highly neglected in the 

Law and Finance theory. . 

86 1d. at 467. 

"'/d. at 470 . 

.. /d. 

89 Jd. (citing johnson et al, Corporate Governance in the Asian Financial Crisis , 58 J. FIN. 
ECON. 141). 

90 For CMS, s'"' Lucian Bebchuk et al., Stock Pyramids, Cross-Ownership, and Dual 
Class Equity: the Mechanisms and Agency Costs of Separating Control f rom Cash Flow 
Rights, in CONCENTRATllD CORPORATE 0WNERSiiiP 295, 295-96 (Randall K. Morek ed., 
>Ooo), available at http:l/www.nber.org/chapters/c90•J·pdf (explaining CMS). As for 
the general explanation of the role of CMS m M&A defense, see Sang Yop Kang, 
Transplanting a Poison Pill to Controlling Shareholder Regimes- Why It Is So 
Difficult, 33 Nw. J. INT'L L. & BUS. 6 •9 (>OtJ). 

25 



A. The Importance of the One-Share-One-Vote Principle 

Voting is a common factor in five out of the six components of ADRI: (•) 

"Proxy Allowed by Mai l"; (1) "Shares Not Blocked Before Meeting"; (3) 

"Cumulative Voting• or "Proportional Representation"; (5) "Preemptive Right"; 

and (6) "Percentage of Share Capital to Call an Extraordinary Shareholders' 

Meeting."9' It is clear that (t), (2), (3), and (6) are directly concerned with 

voting. (5) "Preemptive Right" is al:so pertinent to shareholder voting rights 

since minority shareholders, by relying on the right, can prevent a dominant 

shareholder or management from diluting their voting rights. In this light, 

only (4) "Oppressed Minorities Mechanism" is not closely tied with minority 

shareholders' voting9 ' 

Next, consider OSOV (and OSMV) in t he context of a fundamental 

ideology in relation to voting. Under the OSOV principle, voting rights are 

proportionally given to a shareholder according to her cash flow rights (i.e., a 

shareholder's economic interest in a corporation). Therefore, equal voting 

power for an equal amount of i nvestment is awarded to shareholders 

irrespective of whether they are a dominant shareholder or non-controlling 

minority shareholders. In this sense, OSOV is a core characteristic of corporate 

law that can preserve corporate democracy."' Accordingly, it is generally 

explained that under OSOV, public investors are better protected from 

91 According to SpamMtn, three components of the ADRI are related to voting. "Of the 
s ix AORI components, three are concerned with shareholder voting (voting by mail, 
voting without blockjng of shares, and calling an exc raordinary meeting), and three 
with minority protection (proportional board representation, preemptive rights, and 
judicial remedies)." (citation omiued). Spamann, supra note 8 , at 468. From a different 
perspective, his view is also correct. 

9 1 A country's score for "Oppressed Minorities Mechanism" is one when e ither a 
deriv.ui\•e suit ~y~tcm or ~harcholdcrc' appraisal right in fundamental trJ.ncactions such 
as M&.A is found in corporate law of the country. LL$V, Law and Finance. supra note 5· 
at H22 (table t). Appraisal right is given to dissenting shareho lders who indicate their 
objection to a fundamental transaction,. In this sense, it can be said that, at least in 
some countries, the appraisal right (an<l thus "Oppressed Minorities Mechanism") Is 
indirectly related to vot ing as well. 

93 Compare with politkal democracy characterized as the one-person-o ne-vote 
principle. See, e.g. , FRANK H. EASTERBROOK & DANIEL R. FISCHEL. THE ECONOMIC 

STRUCTURE OF CORPORATE LAW72-73 (•\)96). 

26 



corporate insiders' potential corporate misconduct than under OSMV.94 In 

other words, under OSOV, corporate insiders are unable to use voting leverage, 

so it is difficult for them to make corporate strategies and transactions in favor 

of themselves and at the expense of minor it)' shareholders. 

In contrast, when the OSMV exception (i.e., a deviation from OSOV) is 

allowed, some shareholders- usually a foun~er and his family, executives. or a 

dominant shareholder-have power to leverage their voting rights, while the 

rest of the shareholders lack such privilege. Accordingly, OSMV distorts the 

fundamental principle of voting (i.e., equal treatment for shareholders with 

the same amount of capital investmenti. For instance, suppose that a 

controller's share can cast ten times the amount of votes that a non· 

controlling shareholder's share can. Then. the controller, even if he holds only 

a small amount of·stock ownership (e.g., ro%), is able to exercise a majority of 

voting power. As a result, non-controlling minority shareholders, although 

they own the remaining 90% of the corporation's equity interests, could be 

effectively excluded from corpor.J.te decicion -m.Jking procecsec even in .::m 

annual shareholder meeting. Given the OSMV rule, control is not always 

derived from owning a large number of shares. Rather, it stems from the 

power of casting a la.rge number of votes.•> 

B. Inaccurate Interpretation of One-Share-One-Vote 

As discussed above. OSOV (and the deviation from OSOV) is a critical 

factor in evaluating the quality of corporate governance. Understanding the 

utmost significance of OSOV (or OSMV), LLSV surveyed the implementation 

of OSOV across forty-n ine countries. Nonetheless, at least in some countries, 

LLSV's definition of OSOV (or OSMV) is imprecise from a fonccional 

perspective. 

94 LLSV .. Law and Finance, supra note 5, at 1126-27. 

9S A CMS-based ownership system is made by such discrepancy between ownership and 
voting rights (or control). See gentrolly Bebchuk tt al., supra note 90· 

27 



'· One-Share-One-Vote and One-Shgre-Multiple- Vote 

According to LLSV, "[the score of a country's OSOV] equals one if the 

company law or commercial code of the country requires that ordinary shares 

carry one vote per share, and zero otherwise."~ LLSV described several cases 

where OSOV can be circumvented: "Companies can issue nonvoting shares, 

low- and high-voting shares, founders' shares with extremely high voting 

rights, or shares whose votes increase when they are held longer, as in France." 

This explanation is interesting because LLSV provided the concept of OSOV in 

a negative way by defining OSMV. LLSV clearly recognized a dual-class equity 

structure as an example of non-OSOV (thus OSMV), which is a correct 

explanation. 

Now let us examine the dual-class equity structure in greater depth. Some 

companies use a dual-class equity structure, particularly in the media industry. 

For instance, in News Corporation, Rupert Murdoch's family can exercise 

almost 40% of the votes, but the family only owns approximately u % of the 

company.97The New York Times, the Washington Post Co. and Dow Jones & 

Co. Inc. are also on the list of companies that use dual-class equity 

structures.98 Warren Buffett's Berkshire Hathaway is famous for the structure 

as well.99 Moreover, some companies in the internet -based industry use such 

structures. Examples include Google, Zynga, and Groupon .... Facebook also 

.. LLSV, Law and Finance, supra note 5. at 1122 (table 1). 

"' Dual-Class Shore Structures: The Cost of Control, T HE ECONOMIST Ouly " · 2011), 

available at http://www.economist.com/node/189889J8 . 

.. Alistair Barr, Buffett Defends Newspaper$' Dual-class Shores, MARKIITWATCI·I (May s. 
2007, 5'15 p.m.), available at http://www.marketwatch.com/story/buffett-defends-duai­
Ciass-shares-for-newspapers. 

99 fd.; see olso Brian Womack, Focebook Introduces Dual-Class Structure for Stock, 
BLOOMBERG (Nov. 24, 200<), 18:19 EST), available at 
http://www.bloomberg.com/apps/ news 'pid: newsarchive&sid=aEijG?dEtQWw&pos=.6. 

-Sec syprQ note 97 ("Coogle's IPO in ~004 involved two t lasses of share. Linkedln 
followed suit this year (>ou). The IPO filings ofZynga and Groupon would also grant 
managers control over voting rights."). 

28 



instated a dual-equity structure:•• granting Mark Zuckerberg control over the 

corporation. Relying on a partnership with control leverage in Alibaba (which 

is functionally similar to a dual-class equity structure), jack Ma, the founder, 

exercised control over the company with only approximately 8.9% of 

ownership. •o1. 

Regarding OSOY, the most notable problem of the Law and Finance 

theory is that a dual-class equity structure is noc the only voting mechanism 

that favors dominant shareholders (or corporate insiders). In general, 

corporate insiders have three ways to inflate their votes beyond their cash flow 

rights: (•) a dual-class equity structure; (;) stock pyramiding; and (3) cross­

ownership among affiliated companies"'' (e.g., direct cross-shareholding and 

circular shareholdi ng). By means of one of the above mechanisms or a 

combination thereof, a shareholder- even if his cash flow rights are few­

could exercise control in a corporation. In this respect, stock pyramiding and 

cross-ownershi p are functionally equivalent to the dual-class equity structure 

a~ form~ of voting leverage that create a di~p.ui ty het'\oJecn ca~h flow rights .and 

voting rights.l04 As a safety valve for non-controlling minority shareholders, 

~ Brad Stone, Facebook Will Form 2 Classes of Stock, N.Y. TIMES (Nov. 14, 1009), 
avaUuble at 
hup://W\'IW,nytimcs.com/l009/u/25/tcchnology/internet/2Sfacebook.html?_r=o. 

"" See, e.g., Alibaba /PO Highlights Impish Founder Jack Ma's Rise to China's 
Entrepreneur-in-Chief, Fox NEWS (May 7, 1014), available at 
http://www.foxnews.com/world/2014/05/07/alibaba-ipo-highlights-impish-founder­
jack-ma-rise-to-china-entrepreneur-in/ (explaining jack Ma's 8.g% of ownership in 
Alibaba before the initial public oiTering); see also Leslie Picker, Alibaba Founders to 
Keep Control with Partnership Alternative, BLOOMBERG (May 5, un4, 6:01a.m.), available 
at http://www.bloomberg.com/news/10I4-C5•04/alibaba·founders-to·keep-control­
with-pa rtnership-alternative.html (explaining Alibaba's p::.rtnership st ructure). 

~3 For f"urthcr di:;cu:.;:.;ion of thc:;c three votir.g lcvcrilgc mech;;miGmG, $CC gcner-~lly 

Sebchuk et al., supra note 90· 

.,... One may argue 1hat the arrangement of cc:mmon stock and non-voting preferred 
stock is also functionally equivalent to dual-class equity structure when common stock 
carries one vote and preferred stock does zero votes. In che arrangement of common 
stock-preferred stock, there are two classes of stocks with different voting pOwer. 
However, there are not two classes of common stocks with different vo6ng power (e.g., 
Class A with 10 votes and Class B with 1 vote). Also. s ince investors with preferred stock 
get paid before investors with common stock. preferred stock is characterized as a 
hybrid between stock and debt. In addition, if preferred stock is rarely issued (and thus, 
less frequently traded among investors than common s tock), prefe rred stock cannot be 

29 



OSOV should be interpreted as a principle that protects shareholder voting 

rights commensurate with the amount of capital that they invest in a 

corporation. In the world of LLSV, however, some countries that allow cross­

ownership or stock pyramiding are mis-classified as countries with OSOV, as 

long as they do not allow dual-class equity structures. 

2.. How to Circumvent One-Share-One-Vote without a Dual-Class Equity 

Structure 

In this regard, LLSV's scori ng for OSOV in Korea is exemplary. "'' 

According to LLSV's survey, Korea was awarded one point for OSOV. The 

current score of Korea, if LLSV's methodology applies, would be also one. In 

appearance, such scoring seems reasonable si nce OSOV is explicitly stipulated 

in the Commercial Act. ••• In addition, stock with multiple votes is not 

available in Korea. ,., Moreover, direct cross-sha reholding between two 

corporations- i.e., Company A owns stock of Company B. which owns stoc k of 

Company A- in the same corporate group is prohibited in the Monopoly 

a main tool for corporate insiders who wish to take advanrage of d ifferences in voting 
rights. 

'OS This Sub-section's explanation of Korea is generally based on Nansulhun Choi & 
Sang Yop Kang, Competition Low Me~ts Corporate Governance: Ownership Structure. 
Voting Leverage. and Investor Protection of Lorge Family Corporate Croups in Korea, 2 

PEKING U. TRANSNAT'L L. REV. 411 (1014). 

oo6 Sangbcob (~11:) (Commercial Act), A.ct. No. 12397. Mar. n, 1014, art. 369(1) (S. Kor.). 

' 07 More precisely, due to the recent amendment of the Commercial Act, corporat ions 
in Korea now can issue "'stock without voting rights'" under certain circumstances. See 
id. art. 344-3. According tO the new arrangement, there can be two types of stock 
(including common stock) : one with one vote and the other with zero votes. It is worth 
noting a few further points. First, the n.ew arrangement, which allows common stock 
with zero votes, is different from a structure with two classes of common stock with 
different "'positive" (rather than "'zero") voting power. Thus. "'stock with multiple votes'" 
(e.g .• Class A with to votes and Class 8 with t vote) is still prohibited. Also, the 
nexibility of the arrangement is limited . For instance, srock without voting rights can 
be is$ued up to 25% of the total number of shares (for listed companies, this restriction 
is further relaxed up to so% under special circumstances). Thus, from a perspective of 
corporate insiders, the new arrangement is not an effective voting leverage device. In 
this respect, in Korea, it is still impractical {or very difficult) to use the traditional dual­
class equity structure, which provides a corporate insider with ''control without 
substantial ownership." 

30 



Regulation and Fair Trade Act (MRFTA).ooa If direct cross-shareholding is 

allowed, (1) fictitious capital would be created in two corporations;'09 (2) the 

principle of capital adequacy in corporations could be harmed;"0 and {3) a 

dominant shareholder in a corporate group would have voting rights in both 

corporations in exchange for fictitious capital.'" As a result, decision-making 

power of the dominant shareholder is enhanced without the injection of real 

capital. Until1999, stock pyramiding was effectively prohibited due to concern 

about the concentration of economic power among a small number of 

controlling shareholders in large corporate groups."' 

By a legal loophole, however, circular sharehold ing is not fully 

prohibited. "1 Thus, it is possible that, in the simplest model of three 

corporations in one corporate group, Company A owns stock of Company B, 

which owns stock of Company c,' which owns stock of Company A. In this case, 

fictitious capital is also made through circular shareholding, but it is 

permissible. In the real world, by means of more complicated cross-ownership 

among a large number of affiliated firms (e.g., fifty affiliated firms) in o ne 

corporate group, a dominant shareholder on top of a de facto holding 

company could be the controller of the entire group with only a small amount 

of cash flow rights. 

As I explain elsewhere, Chairman Kun-Hee Lee, a dominant shareholder of 

Samsung Group (the largest corporate group in Korea to which the global IT 

giant Samsung Electronics is an affiliate) merely has o.]% of economic 

• '00 Dokjeom gyuje mit gongjeong geooraeae gwanhan beobyul ( & 1!l Tll!l 'ii t< l!1 )1211 Oil 
i!!~ 'ii:li:i) (Monopoly Regulation and Fair Trade Act), Act No. 13071, jan. 20, 2015, art.9 
($. Kor.). 

'09 HYUN-YOClN SHIN, ECONOMIC V.w 214 (6th ed. 2014). 

uo /d. 

Ill /d. 

"' OH-SEUNC KwON, ECONOMIC LAw 234 (2014). 

113 Circular shareholding was partially regulated by the Total Equity (nvestment Ceiling 
(TEIC). For a brief explanation of the TEIC, see C.oi & Kang, supra note105, at 41.6. 

31 



interests.'" However, he wields a significant amount (almost a majority) of 

voting rights in Samsung Group, which has approximately seventy subsidiary 

companies. This magic takes place due to the combination of complicated 

circular shareholding and quasi-stock pyramiding. "5 Again, it cannot be 

emphasized enough that corporate control ultimately means voting power 

rather than ownership. Decision-making power via votes substantiates 

corporate policies through the resolutions of directors who are in reality 

"chosen" (rather than "elected") by a controller. In short, LLSV's definition of 

the OSOV principle does not captu re the deviation of such principle towar<ls 

circular shareholding, thus enabling a controller to circumvent OSOV. 

In China, OSOV is stipulated in the Company Law as well. "6 It is 

noteworthy, however, that "[a]n important feature of the Chinese system, 

which is also prevalent in other countries, is control through pyramidal 

structures.""' A pyramiding structure is of significance, since it is a device 

designed to functionally weaken the effect of OSOV. Then, "(t)hrough this 

multi-layer structure, a parent company [or ultimately. a controlling 

shareholder) is able to control a large number of group affiliates in different 

industries or markets ... .""8 Via a complicated ownership structure based on 

stock pyramiding, Chinese business people can possibly get around the hurdle 

114 Chairmen of 10 Largest Corporate Crcups Control Corporate Croups with Less Than 1% 

Economic Interests, CHOSUN Oil Ouly 10, 1014, 1>:00 p.m.), 
http:// biz.chosun.com/site{data{html_ dir {zot4f07fto/ zot407tOot68o.html (relying on 
data from the Korea Fair Trade Commission). 

" 5 Note that stock pyramiding was not formally allowed until 1999, thus quasi-stO<ck 
pyramiding {with a de facto holding; company) in circular shareholding has be.en 
frequently used (even after 1999). For a further comparative analysis of a formal 
holding company system and circular shareholding with a de facto holding company, 
see generally Choi & Kang, supra note 1005. 

"' Gongsi Fa ( 0 iij #;) (Company Law) (promulgated by the Standing Comm. Nat'l 
People's Cong., Dec. 2.8, 201), effective Mar. 1, 2014) art. 10), PUBLIC INFORMATION 
SERVICES, available at http:f{fdi.gov.cn/•8ooooo•••-39- 48•4- 0_7.h tml. 
117 Charlie X. Cai, et al., Do Audit Committees Reduce the Agency Costs of Ownership 
Structurt? 17 (Soc. Sci. Research Network, 20u), available at 
http:f{ssrn.com{abstract_id=•339•3• (citations omitted). 

"
8 Yuan Lu & Jun Yao, Impact of State Ownership and Control Mechanisms on che 

Performance of Group Affiliated Companies in China, 13 ASIA PAC. J. M CMT. 485, 4.88 
(2006). 

32 



of OSOV. Accordingly, an individual with a majority of ownership on top of a 

pyramid is able to exercise control over the entire group. In essence, LLSV's 

definition of the OSOV principle does not properly consider deviation from 

osov. 
To understand the effect of voting leverage on control in a simplified 

manner, consider a typical stock pyramiding example in the following. "9 

Suppose that a controlling shareholder owns 51% of stock in Company A, 

which owns 51% of Company B, which in turn owns 51% of Company C. Note 

that the contro!Ung shareholder holds the equivalent of 13.26% of the 

economic interest of Company c."• Nonetheless, the controller can firmly 

exercise a majority of voting power (i.e., 51% voting rights} on Company C 

through a long control -chain connected from the controller on top of the 

corporate group to Company C (via Company A and B). Put differently, the 

controller takes advantage of CMS and a voting mechanism similar to OSMV, 

although a dual-class equity structure is unavailable. Even if he has no share in 

Cnm(')~ny C. hi,; one-dollar inve~tment in Company A carrie~ voting right$ in 

Company C that are approximately four times more powerful than those 

carried by a non-controlling minority shareholder's one-dollar investment in 

Company C. 

3· One·Share·Multiplc· Votc gnd Tunneling 

Once a dominant shareholder's voting rights slightly exceed a majority in 

a corporation-as does the controller of the above corporate group'" -it is 

functionally equivalent to holding 100% of the votes in terms of the results of 

decision-making.'" Theoretically speaking, the dominant shareholder can 

often· ignore the opinion of the other shareholders who are holding 49% of 

119 This hypothetkal example considers a pyramid structure with three layers. 

uo 51% x 51% x SL% = 1).2-6%. Note that this simple hypothetical example does not 
consider debt leverage of corporations in a pyramiding structure. 

u• See supra notes 119-uo and accompanying text. 

m Jt is as·sumcd that shareholders can make decisions with a majority of votes. In the 
case of super-majority requirement, however, this assumption is not valid. 

33 



votes. In such a scenario, the economic interests of the dominant sha reholder 

alone and the corporation (representing all of the shareholders) are detached 

particularly when the dominant shareholder is a CMS controller. Accordingly, 

corporate strategies that are less efficient from the standpoint of the 

corporation could be adopted by the dominant shareholder as long as such 

strategies are personally beneficial to h im. Furthermore, a controlling 

shareholder is able to transfer corporate value from a corporation that he 

exercises control over to himself. Such a practice is called "tunneling. .. u 3 a 

technical term broadly describing the controller's extraction of private benefits 

at the expense of minority shareholders. 

Examine the aforementioned stock pyramiding example in the context of 

tunneling. '"' Suppose that Company A and Company C arc in the same 

corporate group. They have an internal transaction, where conditions and 

terms arc favorable for Company A. Accordingly, Company C bears a loss from 

the transaction. On the other hand, the colltrolling shareholder benefits from 

the transaction: he holds a larger economic interest (51%) in a beneficiary 

(Company A) and a smaller economic interest (13.26%) in a cost bearer 

(Company C). Generally, it is known that as the disparity between cash flow 

rights and voting rights increases (e.g., the controller holds 13.26% of 

ownership ill Company C while he exercises a majority of voting power in the 

company), the problem of tunneling would worsen, since a controller does not 

c~re very much ~bout the co~t incurred to~ damaged comp~ny (c,g., Company 

C) in which he has a lower stake in the ownership. 

Arguably, tunneling has historically been prevalent among large corporate 

groups (not to mention small corporations) in Korea. In Ch ina, due to the lack 

of effective corporate governance mechanisms, protection for minority 

shareholders is weak, "5 so that tunneling has become a common business 

''' See generally Simon Johnson et al., Tunneling, 90 AJ.1. EcoN. REV. u (:z.ooo); see also 
Choi & Kang, supra note 105, at 427-29 (explaining tunneling). 
14 See supra notes 119 -12.0 and accompanying text. 

*'} Kun Wang & Xing Xiao, Controiling Shareholders' Tunneling and ExecutiYe 
Comp•nsation: Evid•nc• from China, 30 ). Accr. & Pus. POL'Y 89, 90 (2011). 

34 



practice.",; In particular, it is explained that a notable form of tunneling in 

China is ''the use of intercorporate loans by controlling shareholders to siphon 

funds from publicly listed companies.""' Ahhough generally "the exact natm·e 

and scope of [tunneling] are difficult to pin down,""" it is likely that tunneling 

would be facilitated more within the context of a corporate group since a 

controlling shareholder can use OSMV (based on stock pyramiding). 

As in Korea, corporate groups are the main market players in China. for 

instance, "(business] groups contribute close to 6o% of the nation's industrial 

output"'"9 in China and "(b]y ~006, there were ~.856 officially recognized 

business groups in China with 27,950 directly owned first tier subsidiaries, 

employing around 30 million people.".,. In Korea, a rypical controll ing 

·shareholder in a large family corporate group holds a very minimal fraction of 

ownership (e.g., t-z%).'" It seems that in China, such a drastic discrepancy 

between a controlling shareholder's cash flow rights and voting rights 

currently is not common (although there is no reliable comprehensive data). 

Nonetheless, priv.ltcly owned corpor.1te gro'.l.ps in China, which h.;tve emerged 

at a rapid pace, are expected to prevalently adopt ownership structures that 

rely upon deep CMS in the near future. According.ly, the problem of tunneling 

in China may worsen. 

It() I d. 

127 Guohua Jiang eL al., Tunneling through Intercorporate Loans: The China Experience, 
98 J. FIN. ECON. 1, 2 (>OJO). But see id. at '7 ("We fond that be<ween 2001 and the end of 
z.oo6, numerous rulings, directives. and other edicts were issued. These efToriS 
culminated in an eight-ministry joint statement in November zoo6 which threatened 
personal action against the toP management of controlling shareholders unJess all 
intercorporate loans from listed companies were repatriated by December )1, wo6.~'), 

118 ld. at t . 

' 19 jia He et al., Business Groups in China, 11 J. CORP. fiN. 166, 167 (zOtJ). 

'30 /d. (ciling State Stal iSi ical Bureau). 

'3' Ownership of Large Corporate Group in 1014. KOREA fAIR TRADE COMMISSION, at 2, 

ovoi/ob/e at http://www .ftc.go.kr/news/ftc/reportView.jsp >report_data_no~5722 
(explaining rhat the average ownership of (.~Cntrolling shareholders in 40 largest 
corporate groups in Korea is 2.0% as of April 1, 2014). The average ownership of 
controlling families as well as controllers is 4.1%. /d. 

35 



4· Summary and Further Considerations 

In sum, in order to understand corporate governance problems and 

properly assess the level of investor protection, it is of significance to 

recognize OSOV more precisely from a functional perspective, taking into 

account not only law·on·the·book but also any possibility of circumventing 

OSOV in practice. For instance, OSOV is placed literally in the corporate law 

system in Korea and China . By relying on circular shareholding and stock 

pyramiding, however, market participants discover ways to circumvent OSOV 

in a legitimate way under existing codes and precedents. 

Thus, according to a functional standard, it would be more precise to 

award zero points to Korea and China in terms of OSOV under the binary 

number system of the ADRI'3' (recall that Korea's OSOV score is one and LLSV 

did not survey China). As for OSOV in the United States, LLSV granted zero 

points. Under the LLSV's methodology, the current score of the United States 

would be zero as well; dual-class equity structures are permissible under U.S. 

corporate law. •n Nonetheless, "dual-class share structures are rare among 

public companies lin the United States].• ,,.. Other means of voting 

mechanisms in favor of a controlling shareholder, such as stock pyramiding 

with multiple layers and partial ownership for a controller's leverage, are not 

common in the U.S. market. In this sense, if a value of either 1 oro is to be 

awarded to the United States for OSOV, then 1 would be more appropriate for 

reflecting reality. 

C. One-Share-One-Vote as a Foundation of Anti-Director Rights 

Since OSOV provides a fundamental ground for shareholder voting rights, 

it significantly affects the allocation of voting power between a dominant 

'Pit would be better to use a sliding-scale score between o and 1 rather than a simple 
binary system of o (noth ing) or 1 (all). Technically, however, it would be extremely 
difficult to quantify in that way. 

•l l ·American corporate law does not require all shares to have voting rights, nor does it 
require all voting shares to have equal voting rights.'' W ILUAM T. ALLEN ET At.., 
COMMENTARIES AND CASES ON THE LAW OF BUSINESS ORGANIZATION •8; (4 th ed. >O~>). 

'"' /d. at 186. 

36 



shareholder and minority shareholders. Accordingly, a country's OSOV/OSMV 

most likely impacts the effectiveness of many voting-related AORI 

components. Consider the cumulative voting >)'Stem. '" As LLSV explain, 

cumulative voting is a corporate governance tool guaranteeing proportional 

representa tion for minorities. However, cumulative voting would be rendered 

less useful for the protection of minority shareholders when combined with an 

exception of OSOV. Suppose a dominant shareholder were to take advantage 

of voting leverage that can make him a CMS controller. Then, it would be 

possible for a shareholder holding 13.26% of cash flow rights to wield 51% of 

voting rights, as seen in the aforementioned example. '36 Under these 

circumstances, cumulative voting would be a less meaningful way to achieve 

its ideology of proportional representation since the voting proportionality for 

minorities is already seriously tainted under the CMS. Thus, a country with 1 

point for cumulative voting actually does not deserve 1 point if the country's 

corporate ownership is based on a structure associated with the deviation from 

osov. 
Suppose that cumulative voting is allowed for corporations in both 

Country A and Country B."' Let us assume that OSOV is firmly established in 

Count1y A but can be legally circumvented in Country B. Under LLSV's 

indexing, both countries obtain 1 point for cumulative vote. Also, Country A 

and Country B are awarded 1 point and o points, respectively, for OSOV. In 

LLSV's research, OSOV is treated as a separate component from the ADRI. 

Thus, the two countries' total AORI scores are not affected by the presence of 

required OSOV. This methodology of indexing has a shortcoming that can be 

critici~ed in t\'10 ways. 

First, there is little reason for OSOV to be: separated from the ADRl: like 

most ADRI components, OSOV is closely tied with voting. In fact, OSOV is 

perhaps the most fundamental voting-related right for public shareholders; 

'35 For a further analysis of cumulative vol ing, see infra Part IV.A. 

'36 See supra notes 119-120 and accompanying te>:t. 

'17 A country .. allowing .. cumulative v-oting is awarded 1 point. See LLSV, Law and 
Finance, supra note 5, at 1122 (table 1). 

37 



indeed, circumvention of OSOV may fundamentally disturb the foundation of 

non -controlling minority shareholders' voting rights. In this respect, it would 

be desirable to assign, for example, z points for OSOV (or negative 2 points for 

OSMV). If so, with all other things being equal; the total AORI score of 

Cou ntry A, including the score of OSOV should be 2 points more t han that of 

Country B. Of course, it is difficult to assign proper weights in a numerical way 

for either OSOV or any component of the ADRI.')8 What this Article seeks to 

emphasize, however, is that the assigned points for OSOV-which protects 

the fundamental voting rights- should be at least higher than those for the 

ADRI components. 

Second, if Law and finance theorists would like to maintain separate 

categories of OSOV and AORI, then the combined effect of OSOV/OSMV and 

voting-related ADRI components should be taken into account when awarding 

a point for such AORI components. To illustrate, OSOV /OSMV can be used as 

a multiplier: 1 if OSMV is not available, or 0.5 if it is. Thus, as for cumulative 

voting, OSOV points for Country A and Country B are 1 and o.s, respectively. 

Again, this Article does not support t he claim that the significance ofOSOV in 

a specific jurisdiction is exactly measurable in terms of a multiplier. Rather, 

this Article explains that the ADRI components- if their effectiveness as 

minority shareholders' rights is affected by OSOV/OSMV- are dependent 

factors of OSOV/OSMV. •w For the sake of simplicity, suppose that the 

multiplier (tor 0.5) is maintained. In a case where both countries equally have 

three dependent AORI components, the OSOV·ADRI combined scores of 

Country A and Country B are 3 (wit h no availability of OSMV) and 1.5 (with 

the availability of OSMV), respectively.40 It is worth noting that according to 

'38 For instantt. 3 points would be more proper for OSOV. 

1.)9 Depending on speciflc laws and regu~lations in a jurisdiction, it is possible that the 
efFectiveness of ADRI components such as "Cumulative Voting" (or "Proportional 
RepresentAtion"), "Preemptive Right." and "Percentage of Share Capital to Call an 
Extraordinary Shareholders' Meeting" is adversely affected by OSMV. For a further 
analysis, see infra Pare IV. 

, .. 3 x 1 = 3 (when OSOV is mandatory) and 3 x 0.5 = 1.5 (when OSMV is allowed). 

38 



the Law and Finance theory, AORI scores of Country A and Country B are 

same, since they have equally three ADRI components. 

It would be more precise if the average discrepancy between a typical 

controller's cash now rights and his voting rights were used as a discount 

factor for a jurisdiction. Note that the "discrepancy discount factor· (another 

form of a multiplier) can be defined as "cas~ now rights over voting rights."'•' . 

When a controller's cash llow rights are low and his voting rights are high, the 

discrepancy discount factor decreases. To illustrate, Country X and Country Y 

allow OSMV and have two dependent ADRI components (whose effectiveness 

as public shareholders' rights is diminished by OSMV). (1) In Country X, 

suppose that on average a typical controller's cash now rights and voting rights 

are 10% and so%, respectively. Then, the discrepancy discount factor is 0.2 (i.e., 

w% + so%). (z) In Country Y, suppose that on average a typical controller's 

cash llow· rights and voting rights are 40% and so%, respectively. Accordingly, 

the discrepancy discount factor is o.8 (i .e., 40% + so%). As a result, the scores 

of dependent ADRI components for Country X and Country Yare 0.4 (i.e., 2 x 

o.2) and 1.6 (i.e., 2 x o.8), respectively. Simply put, the degree of OSMV (i.e., 

how much deviated from OSOV) is penalized according to a discrepancy 

discount factor:.., in general, the more leveraged a controller's voting rights, 

the deeper t he d iscount for the score.'" 

14
' In order to me.asure the discrepancy between a controller's cash now rights and his 

voting rights, in practice. two indicators- "cash flow rights over voting rights'" and 
.. voting rights minus cash flow rights"- are often used. 

'41- A more complicated and comprehensive analysis of OSMV and a discrepancy 
discount factor is beyond the scope of this Article. 

'"1 In general, the voting distortion generated by OSMV is disadvantageous tO public 
shareholders. NonetheJess, OSMV, particularly in terms of cash flow right:>, i:> nol 
always detrimental to public shareholders. For instance, if public shareholders have 
proper information about demerits of their shares in regard to OSMV, they can punish 
an issuer (or its con<rolling shareholder) by discounting the stock price when they 
purchase shares in the marker. Put differently, if OSMV is already expected in the 
market, 'market participants reasonably take into account that factor when pricing. 
Accordi ngly, a country that does not allow unexpected change of terms of a 
corporation's OSMV provides better protection for public shareholders than another 
country t·har allows unexpected change of such t.e:ms. Another weakness of the law and 
Finance theory is that the theory docs not consider this key difference of two types of 
jurisdictions. I currently conduct independent research on these issues. 

39 



IV. CRITICISM OF INOIVIOUAJ. COMPONENTS OF TH E ANTI-DIRECTOR RIGHTS 

INOEX 

This Part scrutinizes whether l..l..SVs ind ividual anti -director rights are 

proper indicators for investor protection. In particular, four ADRI 

components- "Cumulative Voting" (or "Proportional Representation"), 

"Preemptive Righ t," "Oppressed Minorities Mechanism." a nd "Percentage of 

Share Capital to Call an Extraordinary Shareholders' Meeting" -are examined 

in more detail. In addition, this Part explores in greater depth how OSMV·and 

CMS damage the effectiveness of individual ADRl components.""' 

A. Criticism of •rcumulative Voting" 

According to LLSV, if a cumulative voting system is allowed in a 

jurisdiction, the jurisdiction is gran ted one point for the protection of minority 

shareholders. LLSV argue that the availability of a cumulative voting system 

makes it easier for minority shareholders to elect their representatives in a 

board."' The advantage of cumulative voting for minorities is clear when 

compared with straight voting, which is the default election rule in the United 

States. Under straight voting, a shareholder holding 51% of shares can elect a/1 

directors in a board. As a result, a minority shareholder with a s ignificant 

amount of shareholding (e.g., 49%) is not able to have even one director in a 

board no matter how many d irec.tors are to be elected. In contrast, under 

cumulative voting, a minority shareholder can e lect one director if she has 

more than "T I [D + 1]" shares (where 'T" stands for the total number of shares 

outstanding and "D" stands for the total number of d irectors).''6 

1. Cumulative Voting in the Law and Finance Theory and a Divided Board 

144 Note that Pan IILC explains the impact of OSMV on the effectiveness of AORI 
components in gener~l. Part IV includes an explanation and an analysis of how OSMV 
weakens the effectiveness of individual ADRI components . 

... , LLSV, Law and Finance, supra note 5. at 1.127. 

"
6 For the more explanation of the formula, see CHARLES R.T . O'KEU EY & ROBERT B. 

THOMPSON, CORPORATIONS AND OTHER BUSINESS AsSOCIATIONS: CASES AND MATERIALS 167 
(6th ed. 2010). 

40 



Accord ing to the Company Law of China, cumu lative voting can be used 

when electing directors and supervisors.'' ' A few details are worth noting 

about cumulative voting in China and in LLSV's resea rch method ology. First, 

before cumulative voting was introd uced through the Company Law in 2005, 

the system was already implemented for listed companies: according to the 

Code of Corporate Governance for Listed Companies, cumulative voting 

should be adopted for ''[l)isted companies that are more than 30% owned by 

cont rolling shareholders.""" Second, under the Company law, cumulative 

voting is not mandatory. Instead, in principle, corporations are able to remain 

outside the system.'' 9 Since th e Law and Finance theory merely asks whether 

cumulative voting is allowed in a count:y's corporate law system.'"" China 

would be awarded one point for "Cumulative Voting" (or "Proportional 

Representation"). 

Consider the results of cumulative voting. Since a minority shareholder 

may be able to elect a director in a board, a board with cumulative voting has a 

high chance of hei ng divided into two sides (the majority shareholder or 

corporate insiders vs. minority shareholders). Then, a fundamental point of 

inquiry is whether a divided board is really beneficial to enhancing the welfare 

of the entire group of sharehold ers. So far, the debate on this issue has not 

been defini tively resolved. On the one hand, a divided board promotes a more 

democratic process due to participation from the minorities' side. On the 

other ha nd, it is oA:en argued that directors from different factions are 

uncooperative and sometimes even hostile to each other, and accordingly, 

' 41 Gongsi Fa (~ ii)n;) [Company law[ (pro,..,lgated by the Standing Comm. Nat'l 
People's Cong .. Dec. >8, >OIJ, effective Mar. 1, 1014) art. 105. Puouc INFORMATION 
St;KVJt:~. available ac hnp://www.fdl.gov .cn/18oJooou•- 39- 4814_0_7 .hrml. 

"
8 Shangshi Gongsi Zhili Zhunze (..l:.ili~ iil it1lli1£Jiltl) [Code of Corporate Governance 

for Listed Companies in China] (promulgated by the China Sec. Reg. Comm. and State 
Econ. and Trade Comm .. Jan. 7. 2001) art. 3'· CH INA SEC. Rtc. COMM., available at 
http://www.ecgi.org/codes/documents/code_er..pdf. 

' 49 Gongsi Fa (~ill~) (Company Law) (promulgated by the Standing Comm. Nat'l 
People's Cong., Dec. 2.8, 1013, effective M ar. t, 2014) art. 105, PUBLIC INFORMATION 

SERVICES, available at http://www.fdi.gov.cn/18ooooom_J9_48•4-0_7.html. 

•so See LLSV, Low and Finance, supra note s, at 112.2. (table 1). 

41 



efficiency in the corporate decision-making process may be sacrificed. In 

addition, confidential information of a corporation could possibly be leaked 

since a challenger-minority sha~~eholder is sometimes related to the 

corporation's competitor. Thus, it would not be fully convincing to award o~e 

point to a country that allows (or mandates) cumulative voting. 

>. The Law and Finance Theory Does Not Consider "Weak" Proportional 

Representation 

Another criticism against cumulative voting may arise in regard to its 

effectiveness. In relation to the aforementioned formula'S' for a minoriry 

shareholder's minimum required shares to elect one director, it is known that 

a dominant shareholder or management may choose certain strategies to 

lessen the possibiliry that minoriry shareholders retain their representation. 

When "D" (i.e., the number of directorships to be elected) is lowered, the 

number of shares that a minoriry is required to hold in order to elect one 

director increases. Accordingly, a minoriry shareholder will find it more 

difficult to elect her representatives in a board. As a result, even in a country 

where cumulative voting is mandatory, a dominant shareholder or a current 

management team would weaken the purpose of this rule. 

To illustrate, under cumulative voting a minoriry shareholder needs more 

than 10% of shares to elect one director in a nine-member board .'S' Small 

minoriry shareholders with less than 10% of shares (most minoriry 

shareholders fall into this category) are unable to elect their representative by 

themselves. In theory, shares can be collected via an alliance of many small 

shareholders. In practice, however, it would be sometimes d ifficult to form 

one group of many shareholders d ue to procedural issues and the collective 

action problem that dispersed minority shareholders face. Institutional 

investors are relatively large minority shareholders; thus, hardship from the 

collective action problem would be lessened. If, however, a capital market is 

' 5' See supra note 146 and accompanying text. 

' '
1 Put "T .. • aoo%. Then, the formula indicates wo% / 19 +a] • to%. 

42 



not fully developed, then it is likely that there are not many highly developed 

institutional investors in the market. Accordingly, cumulative voting would 

not be useful even if it is instated in a jurisdiction. This explanation provides 

an implication about the cumulative voting system in China. Indeed, stock 

markets in mainland China, such as the Shanghai Stock Exchange and 

Shenzhen Stock Exchange, have grown rapidly in terms of size. Nonetheless, 

their development in capital markets' intangible infrastructure has not 

reached a sufficiently sophisticated level. In particular, the market for 

institutional investors needs to be further improved. '5) As a result, the 

cumulative voting system is still less efficient as an investor protection device 

in China. 

Another strategy, which is often used to defeat the minority's 

representation, is to set up a staggered board.'54 Suppose that a staggered 

board is comprised of three classes (a Delaware corporation's board can have 

three classes). Thus, the aforementioned formula would become •T I [(D/3) + 

1]." Put differently, when il st"ggcrcd b0..1rd is introduced, the number of 

directors to be elected in a shareholder meeting is reduced to one-third. 

Consider again a board with 9 directors; in a staggered board, only 3 directors 

are to be elected in a shareholder meeting. As a result, a shareholder (or a 

group of shareholders) needs at least 25% of votes in order to install a director 

from her side (or from a group of shareholders' side).'" In short, if a staggered 

board is allowed, a minority shareholder will find it more difficult to elect her 

director-candidate in a corporate election. In the extreme case, if a company 

has three seats for directors and adopts a staggered board, only one seat will 

be available in each shareholder meeting. As a result, cumulative voting and 

153 For a similar view, see, for example, Benjarr:in L. Liebman & CurLis J. Milha.upt, 
Reputational Sanctions in ChinaS Securities Mark~t. 1o8 COI..UM. L. REV. 929. 9n (2008). 

'54 O'KELLEY & THOMPSON, supra note 146, at 169 ("For example, MBCA §8.o6 allows 
classification of directors into two or three groups of as equal size as possible. If 
directors are divided into two groups, then each director serves a twO·year term, and if 
classified into three groups, each director serves a three-year term. The ter-ms of all 
directors are staggered so that the term of only one group expires each year."). 

'55 Put "T" = 100%. T hen, the formula indicates 100% l [(9 / 3) + 1] = 15%. 

43 



straight voting generate the functionally same result: a majority shareholder 

with 51% of votes is able to elect all three board members, whereas a 

significant minority shareholder with 49% of votes is not able to elect even 

one seat in the board. 

Consequently, even if two countries have a cumulative voting system, the 

effectiveness of that system could vary widely, depending on (1) the average 

number of directors in a board, and (2) whether a staggered board is allowed 

in the jurisdiction at issue. Thus, without information on the average number 

of directors in a board and the availability of a staggered board in each country, 

LLSV's evaluation of forty-nine countries for cumulative voting is significantly 

incomplete. Since LLSV emphasize: "proportional representation in the board" 

as the very goal of having a cumulative voting system,'56 it is unfair to award 

one point equally to a country with a cumulative voting system that does not 

provide sufficient guaranty for "proportional representation in t he board" and 

to another country that does. 

3· Controlling Minority Structure and Cumulatjve Voting 

In addition, it is worth noting again that the effectiveness of the 

cumulative voting system should be analyzed within the context of CMS. 

Controlling shareholders in many countries (outs ide the Un ited States and the 

United Kingdom) rely upon CMS where they can exercise a disproportionately 

large amount of voting rights, compared to their cash flow rights. Such 

separation of cash flow rights and voting rights can be achieved via voting 

leverage mechanisms. In CMS, a controller exercises a large amount of voting 

rights (e.g., 51%) while he holds only a small amount of shares (e.g., w%), due 

to the opportunity to deviate from OSOV. This example is not unrealistic. For 

instance, a chairman of a large corporate group in Korea-a position usually 

held by a controlling shareholder-often holds less than 2% of economic 

'56 1n their own terminology, cumul,atiive voting and proportional representation are 
considered to be within the same AOR I component. See LLSV. Law and Finance1 supra 
notes. at n» (tablet). 

44 



interests in a corporation. '57 As aforementioned, jack Ma, the founder of 

Alibaba, the largest e-commerce company in China, controlled (and still 

controls) the company with only a fractional ownership.''" 

In this way, discriminatory voting is already built into a CMS, in favor of a 

controlling shareholder (or corporate insicers) and to the detriment of public 

shareholders. Thus, a corrective voting mechanism-e.g., cumulative voting­

is unlikely to sufficiently redress this unfairness. Put differently, the positive 

effect of cumulative voting to protect minority shareholders- if any- could 

easily be eclipsed by a CMS. In this respect, LLSV's methodology-considering 

a cumulative voting system alone without taking into account CMS- is not 

convincing. For instance, when a controlling shareholder with 2% of cash flow 

rights exercises s•% of votes in a corporation, cumulative voting, even if it is 

firmly established, is virtually weakened and does not protect proportional 

voting rights of non-controlling minority shareholders who collectively hold 

98% of cash flow rights. 

Of course, if there is any regulation on a CMS controller's inflated voting 

power in the context of a corporate election, then the unfairness associated 

with CMS would be lessened. For instance, it would be imaginable that a CMS 

controller's voting power .is capped or limited under corporate law, securities 

regulations, or exchange rules. Considering all the factors discussed above, the 

takeaway is that LLSV's scoring system for the cumulative voting system is too 

simple. Given that LLSV surveyed forty-nine countries, the need for such a 

simple scoring system is understandable. Indeed, LLSV's contribution is huge. 

and without their seminal work, the comparative study' of international 

corporate governance would never have reen developed. Nonetheless, simple 

application of the Law and Finance theory could b-e significantly misleading in 

terms of the extent to which minorities' proportional representation is 

protected. 

' 57 See supra note 131 and accompanying text. 

',.a See supra note 102 and accompanying text. Note that AJibaba is incorporated in the 
Cayman Islands and it is listed in New York Stock Exchange (NYSE). In light of this, it 
can be said that the company is not purely a Chinese corporation. 

45 



4· Availability of"Opt-out" and Its Consequence: The Case o(Korea 

In some countries, corporations could circumvent cumulative voting 

through a charter or through its bylaws even when cumulative voting is 

available to public shareholders. The Commercial Act in Korea had no 

cumulative voting provision in December 1998 when LLSV's article of Law and 

Finance was published. Accordingly, Korea had zero points for its cumulative 

voting system. In fact, by amendil>g the Commercial Act in December 28'h 

1998, Korea adopted a cumulative voting rule.'59 Thus, Korea's current score 

for cumulative voting would be one . ..oo Nonetheless, a corporation in Korea can 

opt out of cumulative voting by stipulating in a charter. '6' Since CMS 

controllers in Korea wield a majority of voting rights, they would seek to 

abandon cumulative voting, which is burdensome to them. In reality, 92.1% of 

listed companies in Korea opted out of cumulative voting.'6 ' This fact indicates 

that LLSV's scoring system for cumulative voting is incomplete as it glances 

only at the cumulative voting system as law-on-the-book without considering 

factors that can legally incapacitate the cumulative voting system. Perhaps, it 

would be fair for Korea to receive, for example, o.o8 points since only about 8% 

of listed companies actually adopt cumulative voting. 

B. Criticism of the "Preempt ive Right" 

Preemptive right is the right of existing shareholders to purchase shares 

on a pro-rata basis when a corporati.on issues new shares. Thus, a shareholder 

with 10% of shares has an option to purchase to% of new shares issued by a 

''? As for cumulative voting in general, see Sangbeob (el ~)(Commercial Act!. Act. No. 
1>)97• Mar. 11, 2014, art. )82-2 (S. Kor.). As for cumulative voting in (large) listed 
companies, see id. arc 542~7. 

t6o See LLSV, Law and Finance, supra note 5· at u:u. (table 1). 

,., Su Sangbeob (el'il:) (Commercial Act], Act. No. 12397. Mar. 11, 2014, art. )82-2(1) ($. 
Kor.). See also id. art. 542-7(3) (stipulat ing a special rule of the charter amendment for 
cumulative voting in (large) listed companies). 

Mi: Cumulative Vocing as a Titular System, ASIA Bus. 0Ail.Y (Mar. tJ, 2014, t6:1o). available 
at http://view.asiae.co.kr/news/view.htm?idxno•~0140)1)14070790U6 (stating chat 665 
out of 722. listed <:ompanies in Korea opted out cumulative voting in 2.013, according to 
Financial Supervisory Service). 

46 



company. This preemptive right protects public shareholders mainly for two 

purposes. (1) Without this right, a corporation can issue new shares only to 

corporate insiders in favorable terms (at a discount), at the exclusion of non· 

controlling mi norities. In this sense, the right protects public shareholders 

from d ilution of their share value ... ' (>) In addition, the preemptive right 

protects public shareholders from dilution of their voting power since they are 

entitled to purchase shares proportionately to their existing portion. Th is is 

why it is im portant to note that preemptive right is also tied to shareholder 

voting rights, as this Article explains.'6' In Delaware, t he preemptive right is 

not guaranteed for shareholders . .., In fact, it is the only component of the 

ADRI that the United States lacks. '66 By contrast, as a general ru le, 

shareholders in Korea have the preemptive right under the Commercial Act.o67 

Under the Company law of China, preemptive right applies to a limited 

liability company.'c;o 

Consider any weakness in LLSV's analysis and scoring policy of preemptive 

right. lmportolntly, what the preemptive right provides to shar~holders is 

merely an opportuni ty to be asked to purchase new shares before third parties 

or corporate insiders are exclusively offered the chance.'69 In other words, the 

preemptive right does not give shareholders a gift of new shares; rather, 

shareholders must pay additionally in orde1 to exercise the right. Thus, when 

'6) LLSV, Law and Finance, supra note 5, at 1118 ("This (preemptive] right is intended to 
protect shareholders from dilution, whereby shares are issued to favored investors at 
bclow· markel prices."). 

'
64 See supra notes 91·92 and accompanying text. 

16
' See supra note 41. 

'
66 USV, .(..ow and Finance, supra note 5, at 1130 (table 2); see also id ... at 112.9 ("The only 
dime nsion on which common-law countries are not especially protective is the 
preemptive right to new share issues (44 percent).'"). 

'
6

' See Sangbeob (~~) (Commercial Act], Act. :-Jo. ~>397• Mar. 11, 2.014, art. 418(1) (S. 

Kor.). 

'
68 Gongsi Fa (~fil~) (Company Law] (promulgated by the Standing Comm. Nat'l 
People's Con g., Dec. 28, 2.013, effective Mar. 1, 201.t) art . )4• PUBLIC INFORMATION SERVICES, 

available at http:// www.fdi.gov.cn/18ooooout_J9. 48t4_0_7.html . 

... See. e.g., OK-RMLSONC, LECnJREON COMMERCIAL LAw (sth ed. 2015). at 1093-94· 

47 



they lack sufficient capital to purchase new shares, the only alternative is to 

voluntarily give up the right. In this context, the preemptive right d iffers from 

other anti·dircctor rights that a rc .automatically granted (without any further 

contract consideration) to public investors once they become shareholders. 

For instance, when it comes to shareholders' right to call a special shareholder 

meeting, minority shareholders do not have to pay or give up something 

valuable in exchange for the right. 

Second, under a corporate group setting-which is usually associated with 

CMS-the effectiveness of preemptive right's anti-dilution of shareholders' 

share value and voting power would be significandy lessened. To examine this, 

consider for example an affiliate of a corporate group that functions as a key 

hub in the CMS. Often, such a key affiliate (e.g., the de facto holding company) 

has shareholders who are either core insiders of the group (including 

executives and family members of a CMS controlling shareholder) or 

company-shareholders (other affiliated or related companies of the group).'10 

When the affiliate issues new shares, it is possible that shareholders other than 

the controller may choose not to exercise their preemptive right. If so, the 

controller (and/or his family and third parties under the direct influence of the 

controller) purchases most of new shares (often on favorable terms). Also, the 

controller's voting rights over the key affiliate that affects the ownership 

structure of the corporate group are enhanced, so that his control over the 

entire group can be facilitated despite his small fraction of economic interests 

in other affiliates. In fact, it is likely that such "voluntary" renunciation of 

preemptive right is the result of a controller's explicit or implicit order, which 

is difficult for outsiders to particularize or prove. 

A similar phenomenon was d-emonstrated in the lawsuit related to the 

controversial succession of control ownership in Samsung Group, from 

Chairman Mr. Kun-Hee Lee (the second generation of Samsung family) to his 

•?O See, e.g. , Won·lk Park, Shareholders of Lotte Holdings Sent a Confirmat ion Letter to 
Support Chairman Dong-Bin Shin, CHOSUN Boz (Dec. 3· 2015, 13:57), available at 
http://biz.chosun.com/site/data/html_d ir/>0•5/•2/0J/20t5120JOt623.html?right_ju 
(describing the shareholding structure of Lotte Group). 

48 



children (the third generation). In this case, it was alleged that newly issued 

securities of Everland, an amusement park company and the de facto holding 

company ofSamsung Group at the time, were used to the benefit of the family 

(and !O the detriment of public shareholders ofSamsung Group). Through this 

transaction, the third generation gained a foothold for the inheritance of 

control over Samsung Group (currendy, the number of affiliates is 

approximately seventy) although the family had a fraction of an economic 

interest in Samsung Group. It is likely that issuing new securities in favor of a 

controlling shareholder will be also a critical corporate governance topic in 

China in the near future. This is because family corporate groups have 

emerged in China and controlling family shareholders-who are interested in 

uninterrupted inheritance of their wealth and their continued capacity as 

controllers-would be able to find a legal loophole. 

Due to other shareholders' "voluntary'' renunciation of preemptive right, a 

controlling shareholder can purchase more shares of upstream companies in a 

corporttte group. Then. he can make an internal transaction between an 

upstream company (where he has more eeonomic stake) and a downstream 

company (where he has less economic stake). By setting a transfer price in 

favor of the upstream company, he is able to capture extra profits via self­

dealing. Victims are public shareholders of downstream companies. This 

practice has been allegedly commonplace in Korea (particularly in the past). 

These tunneling cases could be also a serious socio-economic problem in 

China where controlling shareholders are quite strong. 

In add ition, although the preemptive right is in principle awarded to non­

controlling public shareholders, corpora:e law (securities regulations and 

exchange rules as well) sometimes allows exceptions where a corporatjon ean 

issue new shares to particular shareholders (usually corporate insiders) or 

third parties (who are friendly to corporate insiders) on favorable terms."' 

Once there is possibility for such a loophole, innovative lawyers can expand 

'
7

' In Korea, for instance, the Commercial Act stipulates possible exceptions, allowing 
issuance of shares to third parties for "'business purposes.'" Sangbeob (~~) 
(Commercial Act), Act. No. ~>397. Mar. n, >0•4. >rt. 4•8(2) ($. Kor.). 

49 



the scope of such exceptions in favor of corporate insiders, diminishing the 

effectiveness of the preemptive right for public investors. 

In sum, this Section characterizes problems of the preemptive right in four 

ways: (1) it is a right that is not free; (z) the preemptive right could be merely 

nomenclature particularly in jurisdictions of CMS corporate groups; (3) in the 

context of a pyramiding structure, preemptive right can be misused as an 

instrument of tunneling; and (4) legally permissible exceptions may eclipse. the 

principle, weakening the preemptive right. Under these circumstances, the 

preemptive right- even if stipulated in corporate law and firmly enforced by 

government agencies and courts~is not meaningful enough to protect public 

shareholders from corporate insiders. The ADRI fails to recognize this, and 

blindly awards one point to a country if preemptive right is written in the 

corporate law. 

C. Criticism of the "Oppressed Minorities Mechanism" 

Accord ing to LLSV, when legal recourses are available to shareholders who 

are oppressed by a board, a jurisdiction is granted one point. Shareholders' 

·oppressed Minorities Mechanism" is composed of a derivative suit system 

and an appraisal right. 

1. The Operessed Minorities Mechanism: Two Riahts in One ADR/ 

Component 

The "Oppressed Minorities Mechanism• is a unique index component 

since it includes two independent rights for minority shareholders (i.e., a 

derivative suit system and an appraisal right). Other ADRI components are 

composed of only one anti-director right.''' If the derivative suit system and 

appraisal right are perfectly (or substantially) substitutable for one specific 

purpose. LLSV's classification or definition of the "Oppressed Minorities 

Mechanism" would be appropriate. It is likely, however, that the derivative suit 

system and appraisal right are complementary (rather than substitutable) 

171 LLSV, Law and Finance, supra note 5· :n n22·2) (table 1). 

50 



since their goals, functions, and scopes of availability are different. In this 

respect, LLSV's classification of the "Oppressed Minorities Mechanism" wou ld 

be Oawed since it treats a jurisdiction having one of the two mechanisms in 

the same man ner as another jurisdiction having both. Perhaps, it would be 

more relevant for the two mechanisms to be evaluated and scored separately, 

so that ADRI would have seven components. 

Consider that one point in the binary number-based ADRI scoring system 

(i.e., one or zero points) amounts to t6.6% of the total score of a jurisdiction's 

extent of shareholder protection, since one point for a component of ADRI 

accounts for one-sixth of the total score. Given this scoring system, an 

arbitrary standard used by LLSV-namely, awarding one point to a country 

with either of the two mechanisms- would generate significant bias towards 

the total scores of the ADRI for a country (and perhaps for a legal origin as a 

group). In particular, this structural bias would cause a fundamental problem 

in relation to the reliance of LLSV's scholarly methodology upon statistical 

~n~lysis. Stiltistic.:a.l J.n.JJysis b.lSed on t-statistics or statistical sisnificance in 

the Law and Finance account is very subtle. For instance, LLSV explain that 

the corporate governance superiority of common law origin to that of civil law 

origin is supported by statistical signi ficance at the t% level.'" Thus, there is 99% 

confidence that the statement is true in terms of quantitative analysis.'" A key 

question on the methodology, however, is the following: if a 16.6% swing in 

the total ADRI score is determined by LLSV's discretionary standard, which is 

not fully convincing, then why should one care about the law and economics 

implications generated by at% margin of error? 

2. Shareholders· Liclqqcion 

Regarding corporate agents' breach of fiduciary duties, it is highly 

unexpected that directors would bring suit against their colleagues or 

'11 /d. at n31 (explaining that the t-value of common law vs. <:ivillaw is s.oo). 

,,.. /d. (arguing the superiority of English origin vis-a-vis French (and German) origin by 
explaining that the t-values of English vs. French origin and English vs. German origin 
are 4·73 and 3·59· respectively). 

51 



managers of a high position. Therefore, shareholders have the right to bring 

derivative suits on behalf of a corporation when alleged breaches of fiduciary 

duty cases take place; this is considered as a checks·and·balances system 

within the corporation. Despite the variance of significance across countries, 

certain conditions must be satisfied before shareholders bring derivative suits 

against corporate insiders. 

Minimum shareholding requirements exist in some countries, so that only 

a shareholder (or a group of shareholders) holding more than a certain 

percentage of shares outstanding is able to bring suit. for example, in Korea by 

the end of the 1990S, a shareholder was required to hold ;% of shares 

outstanding in order to bring derivative suits."' After the revision in 1998, that 

requirement under the Commercial Act was reduced to 1%. ' 76 In China, 

shareholders' statutory derivative action right was initiated in the Company 

Law in 2005.'" For example, according to the current Company Law of China, 

when directors and managers are in violation of law, administrative regulation, 

or a corporation's articles of association, shareholders who hold 1% or more of 

a company's stake for more than 18o consecutive days may dema nd a lawsuit 

to a supervisors' board (or supervisors).'"' When the board (or supervisors) 

' " ]UNESUN CHOI, CORPORATE LAw 557 (9th ed. >014). As to shareholders' litigation in 
Korea, this Sub-seltion mainly explains legal reforms·in rhe Commercial Act. 

'"See Sangl>eol> (~Ill) [Commercial ActJ, Act. No. 11397· Mar. II, 2014, art. 403(1) (S. 
Kor.). See also id. 54•·6(6) (stipulating special requirements of o.o1% shareholding and 
the 6 month-holding period for listed oompanies). 

"' Hui Huang. The Statutory Derivative Action in Chino: Critical Analysis and 
Recommendations for Reform, 4 BERKELEY Bus. L.). u7. 2>9 (2007). Some commentators 
claim that even before the zoo5 revision, China allowed shareholders' derivative suics. 
See Hui Huang, Shareholder Derivative Litigation in China: Empirical Findings ond 
Comparative Analysis 622 (Soc. Sci. Research Network, :z.ou), available at 
hup://ssrn.com/abstract_id=z1406t3. However, "(a) popular view was ... that the 
provision (before zoos revision] fell short of providing a solid legal basis for derivative 
suits and at best offered a primitive idea of or a prelude to the Slatutory derivative suit 
introduced in the 2005 Company Law.• fd. 

'"' Gongsi Fa (~ii)tl;) [Company Law) (promulgated l>y the Standing Comm. Nat'l 
People's Cong., Dec. 28, 201J, effectilve Mar. t, 2014) art. 151, Pusuc INFORMA·noN 

SERVICES, available at hup:/l•vww.fdi.gov.cn/18ooooo!2l_J9-4814_0_7.html (explaining 
also the case where a supervisor is in violation of law, administrative regulation, or a 
corporation's articles or association). 

52 



refuses or fails to file an action or when it is urgent, shareholders "shall have 

the right to directly institute proceedings in his or their name in a people's 

court for the interests of the company."" 

A primary rationale for the 1% requirement in Korea and China is to 

prevent frivolous suits. However, even the t% requirement is generally a very 

difficult standard to pass since minority shareholders are dispersed and face a 

serious collective action problem. In China, without well-developed 

institutional investors, the collective action problem is more burdensome as 

there tends to be a great number of small individual minority shareholders. 

Accordingly, public shareholders' filing of a derivative suit would be severely 

d iscouraged. In Korea, as for listed companies, shareholders holding o.ot% for 

6 months can bri ng a derivative suit.'& 

The United States (and particularly, Delaware) is quite different from 

many countries since it does not have a demanding shareholding requirement. 

Accordingly, it can be said that public shareholders in Delaware corporations 

have better access to the "Oppressed Minorities Mechanism." In this context, if 

different shareholding rules across countries are not carefully considered, the 

Law tlnd Fin.:mcc theory':; :;implc dichotomy b.:sccd on whether a derivative suit 

system exists in law-on-the-book is unfair and misleading. With regard to 

minimum shareholding, the shareholders' :itigation score for the United States 

should be higher than that for a country with a harsh (e.g., 10%) requirement. 

In addition, each jurisdiction has different shareholders' information 

rights (e.g., the right to demand a shareholders' list and inspect corporate 

books), contemporaneous ownership rules for plaintiffs, pleading 

requirements, evidence discovery systems, insurance/indemnification policies 

for accused directors and officers, and settlement systems. Indeed, such 

differences significantly impact the effectiveness of derivative su its. Suppose 

that a shareholder were prevented from inspecting information pertinent to an 

' 19 fd. (explaining also Lhe case where a board of directors (or executive directors) 
refuses or fails to file an action). 

'"'See Sangbeob (~111) (Commercial A<~]. Act. No. 11397, Mar. u, 1014, art. 541-6(6) (S. 
Kor.). 

53 



alleged breach of fiduciary duty by directors or executives. It would be hard for 

her to put forward specific allegations of directors' (or corpo rate officers') 

breach of fiduciary duties. Therefore, the effectiveness of a derivative suit 

system in a particular jurisdiction also depends upon supporting mechanisms, 

which a re not covered by LLSV. In this context, the coding in the Law and 

Finance theory is too simple to eva luate the complicated infrastructures and 

funcrions involved in shareholders' suits. 

For the foregoing reasons, it is possible t hat the derivative suit system in 

certain countries is merely a corporate law device in name only. Before the 

Asian financial crisis in 1997, Korea was the world's nth largest economy. 

Despite the relatively large size of the Korean economy, for more than three 

decades since the firs t enactment of the derivative suit system in corpo rate law 

in the 196os, not a single derivative suit was brought by shareholders until 

1997.'8' Nonetheless, by the standard derived from the Law and Finance theory, 

"Korea before 1997" is deemed to be a jurisdiction providing shareholders' 

litigation right in its legal system. In reality, this evaluation is incorrect: if 

nobody uses the system for a long time (due to many official/ unofficial 

obstacles), that would be equivalent to the system being unavailable. 

China faces a similar problem: "Shareholder litigation, which in the United 

States serves as a crucial complement to SEC oversight, is simply not yet a 

viable means of investor protection in China.""" In addition, shareholder 

activism-including active litigation- is generally instigated by strong 

minority sha reholders such as institutional investors that t he current Chinese 

market lacks. Since the Chinese economy is dominated by state-owned 

enterprises (SOEs), the State itself is the largest controlling shareholder in 

China. '83 Given this situation, minority shareholders would reasonably 

•lh T he first shareholders' derivat ive suit was brought in the case of Korea First Bank in 
1997. See, e.g., What Is Shareholders' Derivative Suit?, HANKYUNG Ouly, >q, 1998, oo:oo). 
available at http:f{www.honl<yuns.com{ncwo{ oppl ncwovicw .php ' oid-•998072..fO>J7'· 

'
81 Liebman & Milhaupc, supra now 153, at 977· 

'"' See Li-Wen Lin & Curtis ). Milhaupt, We Are the (National) Champions: 
Understanding the Mechanisms of State Capitalism in Chino, 65 $TAN. L. REv. 697, 697 
(201J). 

54 



consider the poli tical ramifications and implications that their complaints may 

generate. In other words, political cost should be taken into account as a 

crucial component of transaction cost associated with investors' collective 

action problem. Nonetheless, China would be considered a country t hat has an 

effective derivative suit system (like the United States), if China were included 

in LLSV's survey. 

It is also noteworthy that derivative suit systems of the Commercial Act in 

Korea in different time periods are markedly different. As explained, there had 

not been a single derivative suit untilt997·'" Due to a series of corporate law 

reforms and the development of market institutions after the end of t990s, 

investors have recently used shareholder litigation in a relatively active way. 

Under the binary score system of the Law and Finance theory (i.e., ·, or o· 

arrangement), however, it is unable to discern between improvement or 

reform of the derivative suit system and nominal shareholder litigation as a 

mere legal decoration.'Ss 

D. Criticism of "Percentage of Share Capital to Call an 

Extraordi nary Shareholders' Meeting" 

"Percentage of Share Capital to Call an Extraord inary Shareholders' 

Meeting" is the last component of the ADRI. When corporate law allows 

shareholders with less than to% of shares to retain the right to call a special 

shareholders meeting, a jurisdiction is awarded one point. Otherwise (i.e., if 

shareholders have no such right or if shareholders holding more than to% 

shares have such right), zero points are accorded. With the numerical cut-off 

of to%, it should be noted that the standard of the scoring system for this 

t&t See supra note 181 and accompanying text. 

'8s Another criticism of the Law and Finance theory with regard to a shareholders' 
litigation right is that the theory does not sufficiently discuss dark aspects of frivolous 
suits brought by public shareholders. 

55 



component is unique, compared to other AORI components where the score is 

generally decided on the grounds of a yes or no inquiry. oM 

As LLSV precisely point out, " ... the higher this [cut•off] percentag@ is, 

the harder it is for minority shareholders to organize a meeting to challenge or 

oust the management." '117 Thus, minority shareholders will find it more 

difficult to call a special shareholder meeting if a reference point is to% than if 

the reference point were, say, 3%.'83 Nonetheless, the same 1 point would be 

given in both cases. Therefore, a natural question is why 10% should be the 

cut·off value for determining 1 oro points for each country. Since 10% could be 

a very high bar for dispersed minoriry shareholders, one may argue that a 

standard of 5% should be adopted. Interestingly, the criterion in the United 

States is 10%, so the United States barely passes the reference point and is 

awarded 1 point. If the reference number were lower than 10% (e.g., 5%), the 

U.S. score for this component would be o. Conversely, if the reference number 

were higher than 10% (e.g., zo%), the U.S. score would still be 1; however, the 

United States would be treated in the same manner as other countri~s with a 

requirement ranging from 10% to zo%, although the U.S. standard is better for 

shareholders. In this regard, the 10% reference point is the .most favorable 

standard for the United States. 

To be sure, the "1 or o• arrangement is too crude to be used for every ADR! 

component; however, when the standard is based on a yes or no distinction, it 

makes sense to some extent since the standard is at least clear. The problems 

stemming from the use of such a simple binary system are more pronounced 

in the "Percentage of Share Capital to Call an Extraordinary Shareholders' 

t86 For instance, if a preemptive right is stipulated, a country marks one point for the 
variable of •preemptive Right," and if not, a country marks zero points. But, note that 
"Oppressed Minorities Mt:,hani:sm"' defines minority shareholders as "those 
shareholders who own 10 percent of share capital or less." LLSV, Law and Finance, supra 
note 5, at nn (table t). In this sense, it can be explained that .. Oppressed Minorities 
Mechanism" does not depends on entirely a yes or no standard. Rather, some features 
o( a numerical standard are also found in "'Oppressed Minorities Mechanism."' 

'87 ld. at nz8. 

'
88 According to Law and Finance, the percentage is i~6 in Japan and to% in the United 
States. ld. at 1130·31 (table >). 

56 



Meeting, • because a specific reference number (i.e., 10%) could be arbitrarily 

used as the dividing threshold between •good countries" and "bad countries." 

According to the 10% standard, a country with a 10.1% rule and another 

country in which shareholders have no r'ght to call a special meeting (i.e., 

even a shareholder with 100% shareholding cannot call a special shareholder 

meeting) are treated the same: the two countries are awarded zero po ints. This 

would be unfair to the country with 10.1% rule. On the other hand, a country 

allowing 9 .9% of shareholders to call a special shareholder meeting is granted 

one point. Such a drastic change from o to 1 due to a o.>% d ifference (i.e., 9.9% 

vs. 10.1%) would be relatively unconvincing, compared to other ADRI 

components distinguishing one country from another based on a clear yes or 

no inquiry. 

In light of this, a decimal point system would be most desirable for' 

"Percentage of Share Capital to Call an Extraord inary Shareholders' Meeting" 

since the variable relies on a percentage. For instance, if a country has a 10% 

requirf:>mP.nt, thf" ciP<im;:al point ~y~rPm r<ln <lW.lrci thP country r.he ha~;ic mark 

of 0.5. As a required percentage decrease> from 10% to o%, the score could 

gradually and continuously increase from 0.5 to 1, generating a scoring system 

with a linear relation between a required percentage and a decimal point score. 

Of course, one problem remains unanswered: why do we have to use a 10% 

standard (rather than a 5% standard or a 20% standard)? This is a weakness 

that is bound to occur in any index that uses a specific number as a cut·off 

standard . 

Another serious weakness of this AORI component is the unfair standard 

that it applies when LLSV compare the United States with other jurisdictions. 

According to LLSV, "for the United States, our reliance on Delaware presents 

a problem since t he state leaves up to corporations the percentage of shares 

needed to call an extraordinary shareholders' meeting. We use to% for the 

United States because the majority of U.S. states (27) use this number.'"69 In 

other words, LLSV first look at Delaware corporate law, and if they find no 

... /d. at 1128 n.6. 

57 



positive aspect, then they look at corporate law in a majority of states. This 

type of cherry picking is often unavailable in other countries. As such, LLSV's 

stanc~ is d~arly based on a double s.tandard. In addition, since a vast majority 

of large public corporations in the United States are incorporated in 

Delaware,'90 it would be less meaningful to pay attention to corporate law in a 

majority of states as LLSV do. Even if LLSV's methodology were accepted, it 

would be fair to award the United States 0.54 points rather than 1 point since 

27 out of 50 states satisfy the 10% req uirement. 

To be sure, the United States is o ne of the best countries in terms of the 

quality of corporate governance; however, this is because it has the best 

quality of markets (i.e., both product and capital markets), legal infrastructure 

(e.g., an efficient enforcement mechanism and fair judiciary) and sound 

business culture, not due to the high score in LLSV's survey. 

V. CONCLUSION 

Since the end of the 1990s, the Law and Finance theory has been a central 

topic in the comparative corporate governance scholarship. Several im portant 

issues of the law and Finance accoumt, however, have been highly neglected in 

debates by LLSV and both their proponents and critics. This Article proposes 

critiques of the law and Finance theory that have seldom been explored in the 

literature. In particula r. features of a controlling shareholders regime (e.g., 

CMS and voting leverage) are scrupulously examined in the context of 

OSOV/OSMV and the ADRI. To this end, examples and evidence from China 

and Korea are used, in addition to t raditional corporate governance theories 

based on the U.S. jurisprudence. 

Above all, when it comes to protection of public shareholders' equal 

voting rights, OSOV should be interpreted as the principle that shareholders 

have voting rights commensurate with their cash flow rights. In this respect, 

l90 For further expla nation on how Delaware be<:ame a center of incorporation in the 
Uni1ed Slates, see generally Marcel Kahan & Ehud Kamar, The Myth of State 
ComJX'tition in Corporate Law, 55 STAN. L. REV. 679 (2002). 

58 



OSOV is ill-defined by LLSV since they do not consider stock pyramiding and 

cross-ownership. In addition, by excluding OSOV from their ADRI scoring 

system, LLSV underrate the importance of OSOV, voting leverage, and the 

CMS, all of which fundamentally affect public shareholders' voting rights. It is 

also noteworthy that many ADRI components that are key factors of the Law 

and Finance theoty are related to public shareholders' voting power. Since the 

deviation from OSOV significantly affects the effectiveness of minority 

shareholders' voting power, it would be less meaningful to discuss 

components of ADRI on a stand-alone basis without considering the 

combined effect with OSOV (and CMS). 

Moreover, most of the original ADRI com ponents designed by LLSV have 

weaknesses as proxies to measure sharet.olders' protection. A cumulative 

voting system is subject to problems in association with a formula'9' and a 

staggered board. In add ition, the effectiveness of cumulative voting is seriously 

a ffected by a deviation from OSOV,'9' which is not fully analyzed by LLSV. The 

preemptive right is not a gift for s h.ucholdcr:;, so ch.Jreholderc .1re not .1ble to 

exercise the right for free as they do other anti-director rights."" In a CMS, the 

preemptive right could become a perfunctory right since shareholders 

(including company shareholders such as affiliated firms) who are under the 

comrol of a dominant shareholder are likely to give up the right.'94 In many 

countries, a derivative suit system is subject to burdensome requirements for 

plaintiff-shareholders. Thus, giving the same treatment to the United States 

(whe re a derivative suit system works well) and many other countries with 

ineffective systems is unfair to the United States. Minority shareholders' right 

to call a special shareholder meeting is another controversial ADRI component 

due to its nu meric cut-off criteria and its double srandard In favor of rhe 

United States. 

1'9
1 See supra note 146 and accompanying text. 

' 91 See supra Part IV .A.) . 

'9J See supra no1c 169 and its accompanying text. 

•!>4 See supra Part IV.B. 

59 



Comparative corporate governance studies become more practical when 

their surveys are based on numbers, scores, and statistics that are ultimately 

reduced to an index. In fact, this Article values this trend of the "quantification 

of the quality" of corporate governance, as it is a useful and practical way to 

assess the quality of investor protection. In this sense, despite the many 

weaknesses of the Law and Finance theory, LLSV have undeniably made great 

contributions in corporate governance scholarship. Nonetheless, indexing 

should be used as a means of a quick litmus test and a supplementary 

methodology. Thus, in order to understand the quality of corporate 

governance across jurisdictions, a more in-depth analysis based on legal 

systems (not limited to a corporate law system), markets, and socio-economic 

infrastructures should be conducted as well, as a complement to index­

oriented research. 

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