The Case Against a Special Corporate Law Regime for Intragroup Transactions

When: 08 Feb 2021, 14:15-15:30
Where: Zoom
Speaker: Sergio Gilotta

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Meeting ID: 986 6611 7223
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Corporate groups with minority shareholders at one or more subsidiaries are common around the world, despite the risks they pose to minority shareholders. Shaping a firm as a web of formally independent, minority-participated legal entities facilitates controllers’ diversion of corporate wealth(tunneling) via intragroup transactions. While many jurisdictions leave the regulation of intragroup transactions to ordinary remedies against self-dealing, others (mostly in Europe) establish a special regime centred on a relaxation of directors’ fiduciary duties. Subsidiary directors are allowed to make disadvantageous decisions that are beneficial to other entities within their group, provided that proper compensation is offered (or may reasonably be expected to beoffered) to the subsidiary. This paper conducts a qualitative cost-benefit analysis of this special regime, focusing on the one devised in the European Model Company Act. We show that it has the capacity to reduce transaction costs and to enhance managerial flexibility within the corporate group, relative to systems governed by ordinary corporate law rules against unfair self-dealing. However, we also show that these benefits can be expected to be limited. Furthermore, we show that this special regime substantially reduces minority shareholder protection against tunneling, by making it harder for minority shareholders to recover damages from controllers’ unfair self-dealing. Overall, our analysis suggests that this regime should not be the default one governing groups with minority shareholders at the subsidiary level. If the regime was adopted as an opt-in solution, adequate protections should be in place for shareholders dissenting from the resolution to opt into the regime.