'The Good, the Bad, and the Ugly': Private Benefits of Control and Their Regulatory Implications

Corporate Ownership and Control, Vol. 5, No. 4, pp. 477-491, Summer 2008

Posted: 29 May 2008 Last revised: 17 Jan 2009

See all articles by Alessio M. Pacces

Alessio M. Pacces

Amsterdam Law School / Amsterdam Business School (ACLE); European Corporate Governance Institute (ECGI); European Banking Institute

Abstract

This paper attempts to shed a new light on the economics and the law of corporate governance. It so does by taking stock of the weaknesses of the standard account of how law "matters" for separation of ownership and control. This account fails to explain comparative corporate governance. Both the ownership structure and the functioning of the market for corporate control do not seem to depend entirely on the strength with which non-controlling shareholders are protected by corporate law. Without claiming that legal protection of minority shareholders does not matter in corporate governance, this paper shows that protection and exchange of corporate control is at least as important and so are the legal institutions that support them. This result is derived by introducing a third category of private benefits of control (idiosyncratic PBC), which supplements the more traditional specifications as inefficient consumption of control perquisites (distortionary PBC) or outright expropriation of shareholder value (diversionary PBC).

The implications for corporate law are broader than those of the law matters framework. Even though legal institutions effectively constrain expropriation of non-controlling shareholders, they may still make corporate governance inefficient when they fail to provide entitlements to uncontested control independently of how much ownership is retained by corporate controllers. Likewise, regulation may undermine the takeover process when it restricts side payments that ultimately support efficient bargaining upon the value of corporate control.

Keywords: entrepreneurship, private benefits of control, entrenchment, comparative corporate governance, ownership structure, takeovers, Coase Theorem, agency costs, incomplete contracts, control premium

JEL Classification: G34, K22, K42, L26, O16

Suggested Citation

Pacces, Alessio Maria, 'The Good, the Bad, and the Ugly': Private Benefits of Control and Their Regulatory Implications. Corporate Ownership and Control, Vol. 5, No. 4, pp. 477-491, Summer 2008, Available at SSRN: https://ssrn.com/abstract=1138257

Alessio Maria Pacces (Contact Author)

Amsterdam Law School / Amsterdam Business School (ACLE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/p/a/a.m.pacces/a.m.pacces.html

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/alessio-pacces

European Banking Institute ( email )

Frankfurt
Germany

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