Bottom Shekel / Tying Capital to Control Could Fell the Pyramids

But the concentration committee was wary of adopting measure without the public weighing in.

Among the concentration committee's many recommendations, linking voting control directly to share of capital held in certain conglomerates seems the most far-reaching of all.The idea was so daring, in fact, that committee members were hesitant to approve it, and will go for further study in public hearings.

If accepted, it could revolutionize holding company structures in Israel, even to the point of dismantling companies organized as control pyramids.

Control pyramids work by controlling subsidiaries far down the chain, through chains of ownership. A holding company with a 51% stake in a subsidiary, which itself has a 51% stake in another subsidiary, will have control of the "granddaughter" firm, even though it owns just a 26% stake.

Under the recommendation, the excess of the parent company's control beyond its stake in capital will be wiped out. In other words, only the 26% of shares in the granddaughter company that the top holding company actually owns (according to the example ) will be taken into account, and with the public holding another 49% - the company's total share capital will be counted as 74 shares (rather than 100 ).

So the holding company's stake in control will shrink from 51% - full majority control - to a mere 33%.

The dilution of control puts the whole purpose of a pyramid structure into doubt. The relative advantage of a pyramid is the ability to control many companies with very little capital. Elimination of the gap between capital and control, or at least its drastic reduction, puts the purpose of maintaining such pyramids into doubt. This is why some concentration committee members think adopting the recommendation would mean the actual dissolution of the pyramids.

Others, however, believe that even with 33% control, the controlling owner would still remain the company's largest shareholder and find it worthwhile to continue holding it. Control would naturally be less entrenched than before, and the controlling owner would need to buy more shares or meticulously ensure good management of the company to enjoy the support of public shareholders. In any case, the public would benefit.

The recommendation was suggested to the committee by Harvard Prof. Lucian Arye Bebchuk, considered one of the world's leading experts on protecting minority shareholder rights.

Concentration committee members were hesitant to adopt the innovative and relatively bold proposal straightaway, and it will be soon raised for discussion in a public hearing.

Though all recommendations will be put before the public, setting this one apart was meant to signal that this is a controversial measure, and that the committee wants to hear the public's reaction before making a final decision.