Abstract

http://ssrn.com/abstract=2282162
 


 



Irreconcilable Differences: Judicial Resolution of Business Deadlock


Claudia M. Landeo


University of Alberta - Department of Economics

Kathryn E. Spier


Harvard University - Law School - Faculty; National Bureau of Economic Research (NBER)

June 19, 2013

University of Chicago Law Review, Forthcoming

Abstract:     
This article studies the judicial resolution of business deadlock. Asset valuation, a necessary component of business divorce procedures, can pose serious problems in cases of closely-held businesses, such as general partnerships and limited liability companies (LLCs). Courts face the challenge of designing valuation mechanisms that will trigger the owners to truthfully reveal their private information.

We theoretically and experimentally assess the ex post judicial design and properties of judicially-mandated Shotgun and Private Auction mechanisms. In the former mechanism, the court would require one owner to name a buy-sell price, and the other owner would be required to either buy or sell his or her shares at the named price. In the latter mechanism, the court would mandate both owners to simultaneously submit a price to buy the other owner's assets. Our experimental findings support our theory: The Shotgun mechanism with an informed offerer is superior to the Private Auction in terms of an equity criterion. In the Shotgun mechanism, the informed offerer has an incentive to truthfully reveal his private information and, as a result, an equitable outcome is more likely to be achieved. The analysis presented in this article provides an equity rationale for the judicial implementation of the Shotgun mechanism in business divorce cases, and demonstrates the empirical feasibility of our proposal.

Number of Pages in PDF File: 36

Keywords: judicial resolution of business deadlocks, general partnerships, limited liability companies, closely-held business entities, Shotgun provisions, buy-sell clauses, cake-cutting mechanisms, auctions, bargaining with common values, asymmetric information, experiments

JEL Classification: K20, K40, C72, C90, D44, D82, Z18

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Date posted: June 21, 2013  

Suggested Citation

Landeo, Claudia M. and Spier, Kathryn E., Irreconcilable Differences: Judicial Resolution of Business Deadlock (June 19, 2013). University of Chicago Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2282162

Contact Information

Claudia M. Landeo (Contact Author)
University of Alberta - Department of Economics ( email )
Edmonton, Alberta T6G 2H4
Canada
HOME PAGE: http://www.arts.ualberta.ca/~econweb/landeo/
Kathryn E. Spier
Harvard University - Law School - Faculty ( email )
1575 Massachusetts
Hauser 302
Cambridge, MA 02138
United States
(617) 496-0019 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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