Cheap-Stock Tunneling Around Preemptive Rights

39 Pages Posted: 11 Jun 2018 Last revised: 7 Nov 2018

See all articles by Jesse M. Fried

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Holger Spamann

Harvard Law School; ECGI

Date Written: June 1, 2018

Abstract

Preemptive rights are thought to protect minority shareholders from cheap-stock tunneling by a controlling shareholder. We show that preemptive rights, while making cheap-stock tunneling more difficult, cannot prevent it when asymmetric information about the value of the offered shares makes it impossible for the minority to know whether these shares are cheap or overpriced. Our analysis can help explain why sophisticated investors in unlisted firms and regulators of listed firms do not rely entirely on preemptive rights to address cheap-stock tunneling, supplementing them with other restrictions on equity issues.

Keywords: Controlling shareholder, tunneling, equity issuance, equity issue, equity tunneling, preemptive rights, minority shareholders, public shareholders, rights offers, rights issues, private firms

JEL Classification: G14, G18, G32, G34, G38, K22

Suggested Citation

Fried, Jesse M. and Spamann, Holger, Cheap-Stock Tunneling Around Preemptive Rights (June 1, 2018). European Corporate Governance Institute (ECGI) - Law Working Paper No. 408/2018; Harvard Public Law Working Paper No. 18-33. Available at SSRN: https://ssrn.com/abstract=3185860 or http://dx.doi.org/10.2139/ssrn.3185860

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Holger Spamann

Harvard Law School ( email )

Cambridge, MA 02138
United States

ECGI ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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