Private benefits of control

Private benefits of control is a technical term used by corporate lawyers and economists. It refers to the economic gain from exerting influence on a company by large shareholders at the expense of small shareholders.

Types

There are two different types of private benefits of control from company value perspective: Benefits which reduce the value of company and which do not so. An example was given by Barclay and Holderness, in comparison to benefits that accrue to all shareholders by raising the productivity of the company.

“ The private benefits can be pecuniary, including higher salaries for individual blockholders or below-market transfer prices for corporate blockholders. For example, T. Boone Pickens alleges that Koito, a Japanese auto part maker, has for many years been subsidizing sales to a large shareholder, the Toyota Car Group. Mr. Pickens recently bought a large block of stock in Koito and demanded board representation, in part to stop the private benefits that allegedly have been flowing to Toyota. Private benefits need not come from the firm’s cash flows, however. For example, there may be nonpecuniary control amenities for individual blockholders [Demsetz and Lehn (1985)] or synergies in production for corporate blockholders [Bradley (1980)].[1] ”

Protection

In order to prevent the impact on the small shareholders from the realization of these benefits of large shareholders, there is usually a Mandatory Offer policy in transaction area for protection of the small shareholders from kinds of value-destroying transactions.

See also

Notes

  1. ↑ MJ Barclay and CG Holderness, 'Private Benefits of Control in Public Corporations' (1989) 25 Journal of Financial Economics 371, 374. The authors go on to argue these benefits could be measured by differences in stock prices: " Our block trades are typically negotiated at arm’s length, and the trading parties presumably forecast rationally the effect of their trade on the stock’s exchange price. Thus, any private benefits will be reflected in the difference between the block-trade price and the post-announcement exchange price."

References


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