Cross-shareholding structures are widely used to enable controlling shareholders to control large listed companies with very little shareholdings and capital, and protect them from hostile takeovers. They are quite common among chaebol in South Korea and keiretsu in Japan, although they are increasingly frowned upon and unwound.
Let's pick an example closer to home, the Jardine Group, to illustrate how it works.
The Jardine Group is a major conglomerate that has been operating in Hong Kong since the 19th century. Most of its major assets, such as Dairy Farm (78 per cent owned), Hongkong Land (51 per cent), Mandarin Oriental (74 per cent), Cycle & Carriage (70 per cent), Astra (35 per cent) and Rothschild (21 per cent), are held by Jardine Strategic.
Jardine Matheson is the group holding company, owning 81.7 per cent of Jardine Strategic, which in turn holds a 54.5 per cent equity interest in Jardine Matheson, hence the cross-shareholding. Both companies are listed on the Stock Exchange of Hong Kong. The Keswick family, which has been running the group since 1874, is estimated to have a stake of less than 10 per cent stake in Jardine Matheson and a negligible equity interest in Jardine Strategic.
The cross-shareholdings are circular. Let's start off with Jardine Matheson, with its control of Jardine Strategic. It happens that Jardine Strategic is also the majority shareholder of Jardine Matheson. But because Jardine Strategic is a subsidiary of Jardine Matheson, Jardine Matheson is effectively controlling itself through Jardine Strategic.
At the centre of this circle are the boards that run both companies. Most of the directors of one company are also directors of the other, and the Keswick family are heavily represented on both boards.