Law and Tunneling

49 Pages Posted: 28 Feb 2011 Last revised: 2 Dec 2011

Vladimir A. Atanasov

College of William and Mary - Mason School of Business

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Conrad S. Ciccotello

Georgia State University - Department of Finance

Date Written: December 8, 2011

Abstract

Insiders (managers and controlling shareholders) can extract (tunnel) wealth from firms using a variety of methods. This article examines the different ways in which U.S. law limits, or fails to limit, three types of tunneling – cash flow tunneling, asset tunneling, and equity tunneling. We examine how U.S. corporate, securities, bankruptcy, and tax law, accounting rules, and stock exchange rules impact each form of tunneling, and identify important weaknesses in these rules. Using case studies, we show how tunnelers exploit these gaps. Decisions to tunnel reflect both legal and informal constraints. We conclude that even though the overall level of tunneling in the U.S. is limited, complex asset and equity transactions and excessive equity compensation can escape both legal and informal constraints.

For a shorter version of this article, see Atanasov, Black, and Ciccotello, Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes, in Brett McDonnell and Claire Hill, editors, Research Handbook on the Economics of Corporate Law ch. 22 (forthcoming 2011), available at http://ssrn.com/abstract=1714591

Keywords: tunneling, dilution, freezeout, controlling shareholders

JEL Classification: K22, K40, G34

Suggested Citation

Atanasov, Vladimir A. and Black, Bernard S. and Ciccotello, Conrad S., Law and Tunneling (December 8, 2011). ECGI - Law Working Paper No. 178/2011; Journal of Corporation Law, Vol. 37, pp. 1-49, 2011; ECGI - Law Working Paper No. 178/2011; Northwestern Law & Econ Research Paper 09-35; U of Texas Law, Law and Econ Research Paper 158. Available at SSRN: https://ssrn.com/abstract=1444414

Vladimir A. Atanasov

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

Conrad S. Ciccotello

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-1711 (Phone)
404-651-4219 (Fax)

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