Zohar Goshen

Shareholder Dividend Options

1. THE USE OF DIVIDEND POLICY To REDUCE AGENCY COSTS 885 A. The Dividend Puzzle .... ................. .. ....... 885 B. Agency-Cost Theory and Stable Dividends ...................... 887 C. Alternatives to Stable Dividends for Reducing Agency Costs 893 1. The Takeover Mechanism ................. ............ 893 2. Debt Financing ................................... 896 3. Shareholder Dividend Voting ............................ 899 4. Shareholder Dividend Options ........................ 903

Corporate Control and Idiosyncratic Vision

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.

Voting (Insincerely) in Corporate Law

Voting lies at the center of collective decision-making in corporate law. While scholars have identified various problems with the voting mechanism, insincere voting—in the forms of strategic voting and conflict of interests voting—is perhaps the most fundamental. This article shows that insincere voting distorts the voting mechanism at its core, undermining its ability to determine transaction efficiency. As further demonstrated, strategic and conflict of interests problems frequently coincide with one another: voting strategically often means being in conflict, and many fact patterns present aspects of both problems. Finally, this article claims that although the two problems have seemingly different solutions, these solutions are essentially similar in nature: all solutions to insincere voting are variations on two basic rules, namely, property rules and liability rules.

Principal Costs: A New Theory for Corporate Law and Governance

The dominant paradigm in corporate law is agency-cost theory, which asserts that the law’s proper role is to reduce managerial agency costs by forcing firms to allocate more control to shareholders. That theory cannot explain why shareholders voluntarily invest in firms that circumscribe their powers to hold managers accountable. This Article introduces principal-cost theory, which states that each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control. Because the optimal division of control is firm-specific, firms rationally select from a range of governance structures that empower shareholders to varying degrees. Principal-cost theory generates more accurate empirical predictions than agency-cost theory. It also suggests different policy prescriptions: rather than banning some governance features and mandating others, lawmakers should permit each firm to tailor its structure based on its firm-specific substitution rate between principal costs and agent costs.

Conflicts of Interest in Publicly-Traded and Closely-Held Corporations: A Comparative and Economic Analysis

Conflicts of interest in corporate law can be addressed by two main alternatives: a requirement of a majority of the minority vote or the imposition of duties of loyalty and fairness. A comparison of Delaware, the UK, Canada, and Israel reveals that while the conflicts of interest problem within publicly-traded corporations receives different treatment in the different jurisdictions — either a fairness rule or a majority of the minority rule — closely-held corporations receive the same treatment of an imposition of duties of loyalty and fairness. This article explains this finding, demonstrating that determining which of these rules is adopted is, in fact, a choice between liability rule protection and property rule protection. This choice depends on the total and relative transaction costs. These costs include both the negotiation costs attendant upon a property rule, as well as the adjudication costs associated with a liability rule. The sum of these costs is influenced by the efficacy of the judicial system and of extralegal mechanisms such as the market for corporate control, the capital market, and the types of investors active in the market. Because the different jurisdictions have different relative costs, due to differences in the economy and the legal systems, publicly-traded corporations are treated differently in each system. However, sometimes conflict of interest situations share the same main characteristics — as with closely-held corporations—leading to the domination of one solution, and thus the same solution is applied for closely-held corporations in the different jurisdictions.