The Law on Company Directors' Self-Dealing: A Comparative Analysis

Abstract

The paper focuses on a specific kind of potentially asset-diverting behavior on the part of corporate directors, self-dealing transactions, providing a comparative analysis of the legal tools employed in the United States, the United Kingdom, Italy, France, and Germany in order to regulate them.

The paper first draws on the debate over whether corporate law should be mandatory or enabling to determine whether the law, as opposed to the market, should be concerned about self-dealing and the potential for abuse. Since the answer depends on many economic and social factors affecting the functioning both of the law and of the relevant markets in any given country, some information on such factors for each of the countries in the sample is provided. Next, the paper describes the factors that any legal system must consider in regulating self-dealing (deterrence, the risk of overkill, deference to private parties' arrangements). It provides then a general account of the regulation of self-dealing in each of the legal systems considered. Finally, it describes the individual legal tools adopted to regulate self-dealing transactions (i.e., prohibition, disclosure, approval or ratification by the board, approval or ratification by shareholders), accounting for the differing degree to which the legal systems in the sample rely on each; a simple analysis of the costs and benefits of each legal tool is also provided.

The analysis shows that the regulation of self-dealing is more sophisticated and has more bite where equity markets have a longer traditions and dispersed ownership of corporations is more common, i.e., in Britain and the United States. As a conclusion, the paper provides some possible explanations for the minor significance of self-dealing regulations in continental Europe, and advocates a reform of the Italian law on self-dealing.

Keywords: Self-dealing, Board of Directors, Conflicts of interests within the corporation, Managerial opportunism, Comparative Corporate Law, Corporate Governance

JEL Classification: K22, G38