7.3 Legal Risks 311repeated. Gradually, SDCM obtained control of the business of Bouyagues SA
with Boyagues SA providing the funding. Boyagues SA was ultimately taken over
by SDCM.^6
7.3 Legal Risks
7.3.1 Parent
The legal risks inherent in chains of companies are obvious. In addition to the risk
of losing control of a key entity in the chain, there are even other risks.
First, the legal rights of the ultimate investor and the management of the firm as
a whole are constrained by non-controlling shareholders rights, and minority
shareholders may be able to block important decisions (Volume I). Like the Ag-
nelli Group, the firm can mitigate this risk by introducing different classes of
shares with different voting rights.
Second, the distribution of assets to entities higher up in the chain are con-
strained not only by the principle of equivalent treatment of shareholders in the
same provisions, legal rules that protect minority shareholders in general, and le-
gal rules that protect creditors (section 10.2). The most important constraint is that
no profits may be distributed to shareholders unless there are distributable assets.
In the Agnelli case, this risk was mitigated in three main ways. The ownership of a
large block of the preference shares of Fiat, the main asset of the Agnelli Group,
ensured that the Agnelli Group (IFIL) was entitled to a substantial amout of profits
if profits indeed were distributed to the shareholders of Fiat. The entity highest up
in the hierarchy owned 3% of the ordinary shares of IFIL meaning that the Agnelli
Group could bypass one entity (IFI) when profits were distributed higher up in the
chain. The entity highest up in the chain was a limited partnership in which the
distribution of assets to owners was flexible.
Third, the legal constraints on the distribution of assets higher up in the chain
lead to structural subordination (section 6.3.2). Combined with the high risk of
expropriation of assets by the ultimate investor, the perceived risk of investors is
bound to be high. This can have an adverse effect on the availability and cost of
funding for companies in the chain and lead to a higher level of corporate risk.
The risk is particularly high when the chain relies on one company for profits. In
fact, the Agnelli Group almost lost control of Fiat in 2005.^7 The firm can mitigate
this risk in many ways. In the Agnelli case, external shareholders of three chain
companies (Fiat, IFIL, IFI) were offered preference shares and promised preferen-
tial treatment should the chain company actually distribute profits. Preference
shares were in other words more senior than the ordinary shares held by the Ag-
nelli Group. Furthermore, the Agnelli Group diversified its investments. Fiat was a
(^6) Creative construction, The Economist, November 2006.
(^7) Still in the driving seat, The Economist, October 2005.