Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes
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
March 6, 2011
RESEARCH HANDBOOK ON THE ECONOMICS OF CORPORATE LAW, Chapter 22, Brett McDonnell and Claire Hill, eds., Forthcoming
Northwestern Law & Economics Research Paper No. 11-07
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 self-dealing transactions – 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 self-dealing, and identify weaknesses in these rules. We argue that a variety of complex asset and equity transactions, as well as equity-based executive compensation, can escape legal constraints. We propose changes in corporate, disclosure, and shareholder approval rules to address the principal gaps that emerge from our analysis.
For an extended version of this article, including case studies illustrating how these loopholes are exploited, see Atanasov, Black, and Ciccotello, Law and Tunneling (2011), 37 Journal of Corporation Law 1-49, available at http://ssrn.com/abstract=1444414.
Number of Pages in PDF File: 44
Date posted: April 8, 2011 ; Last revised: December 2, 2011