The Fourth Asian Roundtable on Corporate GovernanceShareholder Rights and the Equitable Treatment of Shareholders

Eric L. Talley; JD, PhDProfessor of Law and Director of Centre in Law, Economics and Organisation

University of Southern California Law SchoolLos Angeles, CA 90089-0071; United States

Email: etalley@law.usc.edu

Complexity in Corporate Governance:The Case of Corporate Opportunities

Mumbai, India11 November 2002

The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries, the ADB or the World Bank

Principal aim/targets of the COD “Corporate Opportunity Doctrine”

• Objective:– To deter appropriations of new business

prospects “belonging to” the corporation

• Targets:– Officers & Directors of corporation– Dominant Shareholders who take active role in

managing firm

Pre-conditions necessary for a nuanced COD to work well

• Expert Judiciary– Identifying proper LOB, Int/Exp; Adequacy of Disclosure;

Administering Remedy

• Diffuse Ownership– Critical for truly disinterested rejection

• Thick Capital Markets– Permits under-inclusive doctrine, b/c of market monitoring

• Nuanced Executive Compensation Schemes– Reduces incentive to take private benefits using COs

• Relatively Little Uncertainty– Allows for reliable “contracting out”of doctrine

Biggest Challenges in Implementing this type of COD

• Inducing Reliable Shareholder Votes– Implicit patronage to swing shareholders

• The Difficult Case of Cross Ownership– E.g., X owns 51% of Corp A and 30% of Corp

B, and must decide which way to steer project

• Characteristics of “Liquidated” Remedy– Must be set on a priori grounds, in way that is

reasonably related to value of company.