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Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review

38 Pages Posted: 18 Aug 2012 Last revised: 2 Oct 2012

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Alan Schwartz

Yale Law School

Date Written: August 14, 2012

Abstract

We consider how the state should regulate the consumption of pecuniary private benefits of control by controlling shareholders. These benefits have efficient aspects: they compensate the controlling shareholder for monitoring managers and for investing effort to create and implement projects. Controlling shareholders, however, have incentives to consume excessive benefits. We argue here that ex post judicial review of controlled transactions is superior to ex ante restrictions on the creation of controlled structures: the latter form of regulation eliminates the efficiencies as well as the abuses of the controlled company form. We also argue that controlling shareholders should be permitted to contract with minority investors over permissible private benefit consumption. Neither ex post regulation nor contract works well, however, when courts are inefficient and inexpert. Hence, our principal normative claim is that a European level corporate court should be created, whose jurisdiction parties can invoke in their charters or other contracts.

Keywords: private benefits of control, controlling shareholder

JEL Classification: G30, G34, G38, K22, K41

Suggested Citation

Gilson, Ronald J. and Schwartz, Alan, Constraints on Private Benefits of Control: Ex Ante Control Mechanisms Versus Ex Post Transaction Review (August 14, 2012). Yale Law & Economics Research Paper No. 455; Stanford Law and Economics Olin Working Paper No. 432; Columbia Law and Economics Working Paper No. 430; ECGI - Law Working Paper No. 194/2012. Available at SSRN: https://ssrn.com/abstract=2129502 or http://dx.doi.org/10.2139/ssrn.2129502

Ronald J. Gilson (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
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Columbia Law School ( email )

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European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
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Belgium

Alan Schwartz

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4030 (Phone)
203-432-8260 (Fax)

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