Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes

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

44 Pages Posted: 8 Apr 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: March 6, 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 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.

Suggested Citation

Atanasov, Vladimir A. and Black, Bernard S. and Ciccotello, Conrad S., Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes (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. Available at SSRN: https://ssrn.com/abstract=1714591

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)

Paper statistics

Downloads
448
Rank
50,725
Abstract Views
2,075