Corporate Control Transactions

Transactions in corporate control often produce gains for the corporation.Substitution of one set of managers for another, for example, often produces gains because assets increase in value under better management, and would-be managers offer payments to shareholders to compete for the for the right to manage the firm's pool of assets.In other situations managers may "squeeze out" some shareholders in order to reduce the agency costs of management and thereby increase the value of the firm.Managers of a parent corporation may decide that a combination with a partially owned subsidiary will create gains because of economies of scale or management.Finally, managers may seek control of new business opportunities to maximize the profit from exploiting them.These devices for allocating corporate control pose a common problem because they sometimes involve an unequal division of the gains from the transaction.Shares in a control bloc, for example, may be sold at a price greater than that paid for the remaining shares; minority shareholders frozen out in a going-private transaction may receive less than the shareholders not frozen out; managers who personally exploit a corporate opportunity may prosper relative to others.In each case one might argue that the gains should be distributed more widely.Such "sharing" arguments are popular among academic lawyers, and courts are beginning to apply these arguments to some corporate control transactions.We argue, in contrast, that those who produce a gain should be allowed to keep it, subject to the constraint that other parties to the transaction be at least as well off as before the transaction.Any attempt to require sharing simply reduces the likelihood that there will be gains to share.The traditional rule of judicial deference to the arrangements adopted by shareholders and managers still governs in some kinds of transactions.