CONCENTRATED OWNERSHIP REVISITED:THE IDIOSYNCRATIC VALUE OF CORPORATE CONTROL
Zohar Goshen* and Assaf Hamdani**
This Article offers a novel theory of corporate control and uses it to shed a new light on concentrated ownership—the prevalent form of corporate ownership around the world—and a wide spectrum of other corporate ownership patterns. Our core claim is that control allows entrepreneurs to capture the idiosyncratic value that they attach to their execution of their business idea. Under conditions of asymmetric information, control over corporate decision-making allows entrepreneurs to pursue their business idea in whatever manner they see fit even against investors' objections. Our framework identifies a fundamental tradeoff underlying all corporate ownership patterns, namely, the tension, stemming out of asymmetric information, between entrepreneurs' pursuit of idiosyncratic value and investors’ need for protection against agency costs. We show that ownership structures lie on a spectrum representing different allocations of control and cash-flow rights to address this inevitable tension.
Our analysis offers an innovative understanding of firms with controlling shareholders. The predominant view within economic and legal scholarship contends that controlling shareholders’ incentive for holding a control block is their desire to extract private benefits of control. We, however, show that controllers may hold a control block to increase the pie’s size (pursue idiosyncratic value) rather than dictate the pie’s distribution (consume private benefits). Importantly, when the entrepreneur’s idiosyncratic value is ultimately realized, it 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 idiosyncratic value against minority protection. While the corporate law literature has focused solely on minority shareholders’ protection, we show that an equally important focus should be given to controllers’ rights.
* Alfred W. Bressler Professor of Law, Columbia Law School and former Chairman of Israel Securities Authority (Israel's SEC)
** Wachtell, Lipton, Rosen & Katz Professor of Corporate Law, Hebrew University of Jerusalem.