Journal of Law, Finance, and Accounting > Vol 2 > Issue 1

A Contractual Approach to Disciplining Self-dealing by Controlling Shareholders

María Gutiérrez, Universidad Carlos III de Madrid, Spain, , María Isabel Sáez, Universidad Autónoma de Madrid, Spain,
Suggested Citation
María Gutiérrez and María Isabel Sáez (2017), "A Contractual Approach to Disciplining Self-dealing by Controlling Shareholders", Journal of Law, Finance, and Accounting: Vol. 2: No. 1, pp 173-204.

Publication Date: 06 Jun 2017
© 2017 M. Gutiérrez and M. I. Sáez
Corporate finance,  Firm ownership,  Law and economics
Self-dealingMinority ExpropriationPrivate BenefitsCorporate GovernanceCorporate Law


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In this article:
1. Introduction 
2. Literature Review 
3. The Model 
4. Unregulated Outcomes 
5. Regulatory Solutions 
6. Opting-Out 
7. Conclusions 


In this paper we model the relationship between a controlling shareholder and outside investors when the presence of the controlling shareholder generates valuable self-dealing investment opportunities. These self-dealing operations generate private benefits for the controller but they may also be profitable for the outside investors. Our analysis proves that regulation of self-dealing opportunities is necessary to facilitate access to funding when self-dealing is not verifiable, and explains why current regulation does not simply ban all self-dealing operations. We then analyze the two alternative existing enforcement mechanisms, which are based on disclosure and approval rules (Rules-based regime) and/or on litigation rules (Standard-based regime). While both prove effective at facilitating access to funding, we show that an alternative penalty default regulation could improve overall efficiency by providing incentives for the controller and the outside investors to opt-out and implement the first-best contract.