Contracting Over Private Benefits of Control

Abstract

In this comment on Professors Gilson’s and Schwartz’ paper “Constraints on private benefits of control: Ex ante control mechanisms versus ex post transaction review,” I consider their proposal to permit contractual arrangements over private benefits of control (PBC) obtained by controlling shareholders. I argue that PBC can be efficient for two reasons: (1) as a reward for bearing idiosyncratic risk and acting as corporate monitor and (2) as a gain from synergetic, value-enhancing transactions with the corporation. Contracting over PBC can enhance the controlling shareholder’s incentive to pursue valuable projects. To preclude an adverse selection of high-PBC projects, contractual freedom should not extend to the price terms of self-dealing transactions.

Keywords: private benefits of control, shareholder fiduciary duties, corporate group

JEL Classification: K12, K22