The Case Against a Special Regime for Intragroup Transactions

Corporate groups with minority shareholders in one or more subsidiaries are common around the world, despite the risks such arrangements pose to those shareholders. Shaping a firm as a web of formally independent, minority-co-owned legal entities facilitates controllers’ diversion of corporate wealth (tunnelling) via intragroup transactions and other non-transactional techniques. While many jurisdictions leave the regulation of intragroup transactions to ordinary remedies against self-dealing, others (mostly in Europe) establish a special regime centred on a relaxation of directors’ fiduciary duties. Under this special regime, subsidiary directors are not liable if they make disadvantageous decisions that are beneficial to other entities within their group, provided that proper compensation is offered (or, according to some proposals, may reasonably be expected to be offered) to the subsidiary. This paper conducts a qualitative cost-benefit analysis of this special regime, focusing on the European Model Companies Act’s rules on intragroup transactions. We concede that such rules have the advantage of reducing contracting costs and enhancing managerial flexibility within the corporate group, relative to systems governed by ordinary corporate law rules against unfair self-dealing. However, we also show that those benefits can be expected to be very limited. Furthermore, we show that this special regime substantially reduces minority shareholder protection against tunnelling, by making it much harder for minority shareholders to recover damages from controllers’ unfair self-dealing. Overall, our analysis suggests that, for groups with minority shareholders at the subsidiary level, this regime should be implemented as an opt-in arrangement, if at all. Even in that form, it should be adopted together with adequate protections for shareholders dissenting from the midstream resolution to opt into the regime.