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Corporate Control and Idiosyncratic Vision

Zohar Goshen

Columbia University - Law School; Ono Academic College Faculty of Law

Assaf Hamdani

Hebrew University - Faculty of Law

April 1, 2013

Columbia Law and Economics Working Paper No. 444
ECGI - Law Working Paper No. 206
Yale Law Journal, Vol. 125, 2016

This Article offers a novel theory of corporate control. It does so by shedding new light on corporate-ownership structures and challenging the prevailing model of controlling shareholders as essentially opportunistic actors who seek to reap private benefits at the expense of minority shareholders. Our core claim is that entrepreneurs value corporate control because it allows them to pursue their vision (i.e., any business strategy that the entrepreneur genuinely believes will produce an above-market rate of return) in the manner they see fit. We call the subjective value an entrepreneur attaches to her vision the entrepreneur’s idiosyncratic vision. Our framework identifies a fundamental tradeoff, stemming from asymmetric information and differences of opinion, between the entrepreneur’s pursuit of her idiosyncratic vision and investors’ need for protection against agency costs. Entrepreneurs and investors address this inevitable conflict through different ownership structures, each with different allocations of control and cash-flow rights.

Concentrated ownership, therefore, should not be viewed as an unalloyed evil. To the contrary, it creates value for controlling and minority shareholders alike. Our analysis shows that controlling shareholders hold a control block to increase the pie’s size (pursue idiosyncratic vision) rather than to dictate the pie’s distribution (consume private benefits). Importantly, when the entrepreneur’s idiosyncratic vision is ultimately realized, the benefits will be distributed pro rata to all investors.

Our framework provides important insights for investor protection and corporate law doctrine and policy. We argue that corporate law for publicly traded firms with controlling shareholders should balance the controller’s need to secure her idiosyncratic vision against the minority’s need for protection. While the existing corporate-law scholarship has focused solely on the protection of minority shareholders, we show that it is equally important to pay heed to the rights of the controlling shareholders.

Number of Pages in PDF File: 58

Keywords: Concentrated Ownership, Dispersed Ownership, Corporate Law, Self Dealing, Entire Fairness, Dividend, Freezeout, Business Judgment Rule, Agency Cost, Control Premium, Financial Contracting, Asymmetric Information, Idiosyncratic Vision, Dual Class Shares, Controlling Shareholder, Minority Protection

JEL Classification: K22, D23, D82, G32, G34, L22

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Date posted: March 4, 2013 ; Last revised: January 20, 2016

Suggested Citation

Goshen, Zohar and Hamdani, Assaf, Corporate Control and Idiosyncratic Vision (April 1, 2013). Columbia Law and Economics Working Paper No. 444; ECGI - Law Working Paper No. 206; Yale Law Journal, Vol. 125, 2016. Available at SSRN: https://ssrn.com/abstract=2228194 or http://dx.doi.org/10.2139/ssrn.2228194

Contact Information

Zohar Goshen (Contact Author)
Columbia University - Law School ( email )
435 West 116th Street
New York, NY 10025
United States
212-854-9760 (Phone)
212-854-7946 (Fax)

Ono Academic College Faculty of Law
104 Zahal St.
Kiryat Ono, 55000
972-50-5344332 (Phone)
972-3-5356120 (Fax)
HOME PAGE: http://www.hakirya.ac.il
Assaf Hamdani
Hebrew University - Faculty of Law ( email )
Mount Scopus, 91905

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