The sell-out right as an agency control mechanism

• Main Author: Boizard, Matthias
• Published: London School of Economics and Political Science (University of London) 2009
• Subjects: 658.15
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645874

This work seeks to demonstrate why current strategies aimed at limiting the exploitation of minority shareholders by majority shareholders in private companies are insufficient and argues in favour of the introduction of an agency theory-based control mechanism in the form of a sell-out right, under certain circumstances to be assessed in court. This stems from the observation that certain corporate governance failures are inherent in the very nature of the private company, which is dominated by an individual and/or a family or by a company acting as controlling shareholder when the private company is a subsidiary of a group of companies. Because of the divisive nature of the majority principle, ownership is separated from control in private companies, whether the company is majority owner-managed or managed by professional managers. Thus, much like public companies, private firms dominated by one single shareholder or by a group of shareholders are prone to agency costs resulting from adverse selection and moral hazard. We address throughout this work the specific agency problems arising in companies in which power is divided along a line separating controlling shareholders from non-controlling shareholders. Such agency problems are exacerbated in private companies because no market exists for the shares such that minority shareholders may be trapped in an irremediably adverse situation. We argue that a sell-out right is the best remedy to such agency costs.