Conflicts of Interest in Publicly-Traded and Closely-Held Corporations: A Comparative and Economic Analysis

Abstract

Conflicts of interest in corporate law can be addressed by two main alternatives: a requirement of a majority of the minority vote or the imposition of duties of loyalty and fairness. A comparison of Delaware, the UK, Canada, and Israel reveals that while the conflicts of interest problem within publicly-traded corporations receives different treatment in the different jurisdictions — either a fairness rule or a majority of the minority rule — closely-held corporations receive the same treatment of an imposition of duties of loyalty and fairness. This article explains this finding, demonstrating that determining which of these rules is adopted is, in fact, a choice between liability rule protection and property rule protection. This choice depends on the total and relative transaction costs. These costs include both the negotiation costs attendant upon a property rule, as well as the adjudication costs associated with a liability rule. The sum of these costs is influenced by the efficacy of the judicial system and of extralegal mechanisms such as the market for corporate control, the capital market, and the types of investors active in the market. Because the different jurisdictions have different relative costs, due to differences in the economy and the legal systems, publicly-traded corporations are treated differently in each system. However, sometimes conflict of interest situations share the same main characteristics — as with closely-held corporations—leading to the domination of one solution, and thus the same solution is applied for closely-held corporations in the different jurisdictions.