particular form of controlled ownership in Russia may be unique, experience teaches that in newly industrialized economies-also require strong minority protections shipstructure family-controlled companies with minority public participation--the classic owne Outside investors, facing ex ante a high risk of insider opportunism, will insist on a high expected rate of return in the cases when insiders turn out to behave properly, to compensate for the risk of bad behavior. In an extreme case like Russia, where the risk of insider opportunism is especially high(we explore below the multiple reasons for this), these rational discounts of share prices--to far below the shares' fair value assuming good behavior--can virtually paralyze the equity markets. Honest(nonopportunistic)managers won,' t offer shares at what they see as ridiculously low prices. Investors, meanwhile, won't pay more because they don't know which managers will misbehave. The risk of government misbehavior(such as renationalization, currency controls, or confiscatory taxation) further increases the gap between managers perception of their firms value and market prices for the firms shares. Russian companies that have sought to issue shares have found that investors are willing to pay only a fraction of the companys true worth In theoretical terms, Russian companies operate in a market with a severe"lemons (adverse selection) problem, in which only low-quality issuers are interested in raising equity capital at current prices. Strong minority protections respond to this problem by narrowing the range and reducing the likelihood of insider opportunism. Investors will then pay more for Komineft before the issuance was belatedly announced. See Neela Banerjee, Russian Oil Company Tries a Stock Split in the Soviet Style, Wall St J, Feb. 15, 1995, at Al4. Efforts by the Russian Securities Commission to have the issuance cancelled failed: Komineft's management merely apologized to investors and promised not to make a secret share issuance again. See Julie Tolkacheva, Komineft Agreement Leaves Investors Cool. Moscow Times. Oct. 31.1995 at 111 I8 In the Czech Republic, for example, mass privatization led to financial institutions(usually banks and investment funds)and financial-industrial groups holding controlling stakes in many large companies. See Coffee, Czech Institutional Investors, supra note 12, at 112-13 I 9 It is well established that, under an American-style enabling statute, controlling shareholders frequently extract private gains from corporations at the expense of minority shareholders, despite the market constraints discussed in section L.A. See, e.g, Michael J. Barclay Clifford G. Holderness, The Law and Large-Block Trades, 35 J. L.& Econ. 265, 267-78(1992): Stuart Rosenstein David F. Rush, The Stock Return Performance of Corporations That Are Partially Owned by Other Corporations, 13 J. Fin. Res. 39(1990) Roger C. Graham, Jr. Craig E. Lefanowicz, The Valuation Effects of Majority Ownership for Parent and Subsidiary Shareholders(Oregon State Univ. College of Bus. Working Paper, Feb. 1996) 20 Two examples: first, in the one true Russian public stock offering to date, by the Red October candy company in 1994, relatively few investors were willing to buy at the offering price. See Janet Guyon, Russian Firms Face Fund-Raising Woes in the Wake of Privatization Explosion, Wall St J, Apr. 17, 1995, at B6A Second, the Russian natural gas giant, Gazprom, tried in mid-1995 to sell a roughly 10% stake to foreign investors, but withdrew the offer after discovering that the price investors would pay was far below outside estimates of Gazprom's true value. See Steve Liesman, Limits on Sale Damp Shares of Gazprom, Wall St J Eur, Apr. 3, 1995, at 11Komineft before the issuance was belatedly announced. See Neela Banerjee, Russian Oil Company Tries a Stock Split in the Soviet Style, Wall St. J., Feb. 15, 1995, at A14. Efforts by the Russian Securities Commission to have the issuance cancelled failed: Komineft's management merely apologized to investors and promised not to make a secret share issuance again. See Julie Tolkacheva, Komineft Agreement Leaves Investors Cool, Moscow Times, Oct. 31, 1995, at 111. 18 In the Czech Republic, for example, mass privatization led to financial institutions (usually banks and investment funds) and financial-industrial groups holding controlling stakes in many large companies. See Coffee, Czech Institutional Investors, supra note 12, at 112-13. 19 It is well established that, under an American-style enabling statute, controlling shareholders frequently extract private gains from corporations at the expense of minority shareholders, despite the market constraints discussed in section I.A. See, e.g., Michael J. Barclay & Clifford G. Holderness, The Law and Large-Block Trades, 35 J.L. & Econ. 265, 267-78 (1992); Stuart Rosenstein & David F. Rush, The Stock Return Performance of Corporations That Are Partially Owned by Other Corporations, 13 J. Fin. Res. 39 (1990); Roger C. Graham, Jr. & Craig E. Lefanowicz, The Valuation Effects of Majority Ownership for Parent and Subsidiary Shareholders (Oregon State Univ. College of Bus. Working Paper, Feb. 1996). 20 Two examples: first, in the one true Russian public stock offering to date, by the Red October candy company in 1994, relatively few investors were willing to buy at the offering price. See Janet Guyon, Russian Firms Face Fund-Raising Woes in the Wake of Privatization Explosion, Wall St. J., Apr. 17, 1995, at B6A. Second, the Russian natural gas giant, Gazprom, tried in mid-1995 to sell a roughly 10% stake to foreign investors, but withdrew the offer after discovering that the price investors would pay was far below outside estimates of Gazprom's true value. See Steve Liesman, Limits on Sale Damp Shares of Gazprom, Wall St. J. Eur., Apr. 3, 1995, at 11. 10 particular form of controlled ownership in Russia may be unique,18 experience teaches that family-controlled companies with minority public participation -- the classic ownershipstructure in newly industrialized economies -- also require strong minority protections.19 Outside investors, facing ex ante a high risk of insider opportunism, will insist on a high expected rate of return in the cases when insiders turn out to behave properly, to compensate for the risk of bad behavior. In an extreme case like Russia, where the risk of insider opportunism is especially high (we explore below the multiple reasons for this), these rational discounts of share prices -- to far below the shares' fair value assuming good behavior -- can virtually paralyze the equity markets. Honest (nonopportunistic) managers won't offer shares at what they see as ridiculously low prices. Investors, meanwhile, won't pay more because they don't know which managers will misbehave. The risk of government misbehavior (such as renationalization, currency controls, or confiscatory taxation) further increases the gap between managers' perception of their firm's value and market prices for the firm's shares. Russian companies that have sought to issue shares have found that investors are willing to pay only a fraction of the company's true worth.20 In theoretical terms, Russian companies operate in a market with a severe "lemons" (adverse selection) problem, in which only low-quality issuers are interested in raising equity capital at current prices. Strong minority protections respond to this problem by narrowing the range and reducing the likelihood of insider opportunism. Investors will then pay more for