Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review

Details

Author(s):
Publish Date:
August 14, 2012
Publication Title:
169 Journal of Institutional and Theoretical Economics 160 / Yale Law & Economics Research Paper No. 455 / Stanford Law and Economics Olin Working Paper No. 432 / Columbia Law and Economics Working Paper No. 430 .
Format:
Working Paper
Citation(s):
  • Ronald J. Gilson, Alan Schwartz, Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review, 169 Journal of Institutional and Theoretical Economics 160 (2013) / Yale Law & Economics Research Paper No. 455 / Stanford Law and Economics Olin Working Paper No. 432 / Columbia Law and Economics Working Paper No. 430 (2012).

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Abstract

We consider how the state should regulate the consumption of pecuniary private benefits of control by controlling shareholders. These benefits have efficient aspects: they compensate the controlling shareholder for monitoring managers and for investing effort to create and implement projects. Controlling shareholders, however, have incentives to consume excessive benefits. We argue here that ex post judicial review of controlled transactions is superior to ex ante restrictions on the creation of controlled structures: the latter form of regulation eliminates the efficiencies as well as the abuses of the controlled company form. We also argue that controlling shareholders should be permitted to contract with minority investors over permissible private benefit consumption. Neither ex post regulation nor contract works well, however, when courts are inefficient and inexpert. Hence, our principal normative claim is that a European level corporate court should be created, whose jurisdiction parties can invoke in their charters or other contracts.