Blinded by ‘Fairness’: Why We Need (Strong) Procedural Safeguards in Screening Self-Dealing and Obtaining A Fair Price Is Not the Answer

forthcoming in European Business Organisation Law Review (2022)

37 Pages Posted: 8 Jul 2021 Last revised: 25 Apr 2022

See all articles by Alperen Gözlügöl

Alperen Gözlügöl

London School of Economics - Law School

Date Written: June 30, 2021

Abstract

Ex post court review of related party transactions (RPTs) is one of the main mechanisms to handle the problem of value-diversion in public companies via self-dealing and extensively made use of in Delaware and until relatively recently in most Continental European countries. Such a court review has also become to be known as the ‘fairness test’ whose contours may change depending on the jurisdiction and contexts in which it is applied. This study takes issue with the court review of the actualized transactions under some standards from two different perspectives. Firstly, it is argued that the behavioral insights derived from the studies by behavioral economists and psychologists suggest that a legal regime that solely depends on the court review of substantive merits of RPTs without any (strong) procedural safeguard may fail to create a robust regime against value-diversion. Secondly, acknowledging that the court review of substantive merits of RPTs may be inevitable in some cases, the study then turns attention to the fairness test itself that compares the terms of an RPT to an arm’s length transaction, and argues that such an objective test fails to fully prevent value-diversion. Accordingly, a recalibration of the test and a new framework are proposed.

Keywords: related party transactions, court review, fairness test, behavioural economics, law and economics

Suggested Citation

Gözlügöl, Alperen Afşin, Blinded by ‘Fairness’: Why We Need (Strong) Procedural Safeguards in Screening Self-Dealing and Obtaining A Fair Price Is Not the Answer (June 30, 2021). forthcoming in European Business Organisation Law Review (2022), Available at SSRN: https://ssrn.com/abstract=3877073

Alperen Afşin Gözlügöl (Contact Author)

London School of Economics - Law School ( email )

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
147
Abstract Views
564
Rank
366,384
PlumX Metrics