Related party transactions by directors/managers in public companies: a data-supported analysis

ABSTRACT

Related party transactions (RPTs) are a primary way for corporate insiders to expropriate company value. Conventional wisdom in corporate law theory holds however that RPTs entered into by directors/managers (rather than controlling shareholders) are of lesser concern in both controlled and dispersedly-owned companies. This article challenges this conventional wisdom and puts forward various other theories under which RPTs entered into by directors/managers remain a significant concern in terms of value-diversion in both share-ownership structures. The article then presents hand-collected data of RPTs entered into by directors/managers who are not significant/controlling shareholders in companies listed on the prime standard of the German stock exchange. This dataset and its evaluation provide preliminary indications and exploratory evidence regarding the threat posed by RPTs entered into by abovementioned persons. Furthermore, up-to-date share-ownership data of those companies and several findings regarding disclosure practices are provided. The article closes with proposing a few regulatory improvements and implications.

KEYWORDS:

• Related party transactions
• minority shareholder protection
• controlling shareholders
• directors/managers
• share ownership

Acknowledgements

I would like to thank Prof. Wolf-Georg Ringe and Prof. Christoph Kumpan for their guidance during the writing process. I extend my thanks to the anonymous reviewer for the valuable comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 ‘Factbox: Financial wrongdoing allegations against Carlos Ghosn’, Reuters (8 January 2020) <https://www.reuters.com/article/us-nissan-ghosn-allegations-factbox/factbox-financial-wrongdoing-allegations-against-carlos-ghosn-idUSKBN1Z71QI>.

2 See Nobuhisa Ishizuka, ‘Why Is Carlos Ghosn Afraid of the Japanese Justice System?’, The New York Times (16 January 2020) <https://www.nytimes.com/2020/01/16/opinion/carlos-ghosn-japan.html> (explaining the controversial aspects of Japanese criminal prosecution system); Matthew Campbell, ‘The Tokyo Job: Inside Carlos Ghosn’s Escape to Beirut’, Bloomberg Businessweek (14 January 2020) <https://www.bloomberg.com/news/features/2020-01-14/how-nissan-s-carlos-ghosn-was-smuggled-out-of-japan> (detailing Carlos Ghosn's escape).

3 See Kana Inagaki and Leo Lewis, ‘Former Nissan Chairman Carlos Ghosn Rearrested in Japan’, Financial Times (21 December 2018) <https://www.ft.com/content/e4ec80f8-04c5-11e9-99df-6183d3002ee1>.

4 See Sean McLain, ‘Nissan Probe Alleges Ghosn Used Company Money to Buy Homes, Enrich His Sister’, Wall Street Journal (22 November 2018) <https://www.wsj.com/articles/nissan-probe-alleges-ghosn-used-company-money-to-buy-homes-enrich-his-sister-1542938765?mod=article_inline&mod=article_inline>.

5 See Leo Lewis, Kana Inagaki and Ahmed Al Omran, ‘Nissan expands Carlos Ghosn investigation’, Financial Times (28 December 2018) <https://www.ft.com/content/a7949ce0-0a88-11e9-9fe8-acdb36967cfc>. For further allegations of dubious value-diverting behaviour, see Sean McLain, Phred Dvorak, Sam Schechner and Patricia Kownsmann, ‘The Fall of the House of Ghosn’, Wall Street Journal (16 December 2018) <https://www.wsj.com/articles/the-fall-of-the-house-of-ghosn-11545003310>; Kana Inagaki, Leo Lewis and Chloe Cornish, ‘Laptop in Lebanon helped Tokyo prosecutors charge Carlos Ghosn’, Financial Times (9 May 2019) <https://www.ft.com/content/b334fe26-718c-11e9-bf5c-6eeb837566c5>.

6 For example, according to International Accounting Standard 24, the definition of related party transaction includes transactions with a member of key management personnel or a close member of that person's family. See IAS 24, para. 9.

7 See <https://www.nissan-global.com/EN/IR/STOCK/INFORMATION/> accessed 25 March 2020. Although this percentage of shareholding does not provide an incontestable control, it is highly likely that Renault SA has had such a control given that the rest of share-ownership is highly dispersed.

8 See <https://fr.linkedin.com/in/carlosghosn> accessed 12 October 2020.

9 See <https://group.renault.com/en/finance-2/financial-information/key-figures/> accessed 13 October 2020.

10 See Vladimir Atanasov, Bernard Black and Conrad S Ciccotello, ‘Law and Tunneling’, 37 J. Corp. L. 1, 5–9 (2011) (detailing how insiders can extract value from firms through self-dealing transactions); Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘The Law and Economics of Self-Dealing’, 88 J. Fin. Econ. 430 (2008) (presenting the anti-self-dealing index as a new measure of legal protection of minority shareholders against expropriation by corporate insiders).

11 Notable exceptions include Luca Enriques, ‘The Law on Company Directors’ Self-Dealing: A Comparative Analysis’, 2 Int’l. Comp. Corp. L. J. 297 (2000); Andrew Keay, ‘The Authorizing of Directors’ Conflicts of Interest: Getting A Balance’, 12 J. Corp. L. Stud. 129 (2012). See also Klaus J. Hopt, ‘Conflict of Interest, Secrecy and Insider Information of Directors, A Comparative Analysis’, 10 ECFR 167 (2013); Klaus J. Hopt, ‘Self-Dealing and Use of Corporate Opportunity and Information; Regulating Directors’ Conflicts of Interest’, in Klaus J Hopt and Gunther Teubner (eds), Corporate Governance and Directors’ Liabilities 285 (1985).

12 Dispersed share ownership is more common only in the US, the UK and partly in Japan. See, e.g. Rafael La Porta, Florencio Lopez-De-Silanes and Andrei Shleifer, ‘Corporate Ownership Around the World’, 54 J. Fin. 471 (1999); Mara Faccio and Larry HP Lang, ‘The Ultimate Ownership of Western European Corporations’, 65 J. Fin. Econ. 365 (2002); Julian Franks, Colin Mayer and Hideaki Miyajima, ‘The Ownership of Japanese Corporations in the 20th Century’, 27 Rev. Fin. Stud. 2580 (2014); Stijn Claessens, Simeon Djankov and Larry HP Lang, ‘The Separation of Ownership and Control in East Asian Corporations’, 58 J. Fin. Econ. 81 (2000). For a recent study of corporate control, see Gur Aminadav and Elias Papaioannou, ‘Corporate Control around the World’, 75 J. Fin. 1191 (2020).

13 See infra note 16–18.

14 See supra note 12.

15 See infra note 34–35. Executive compensation is in fact a specific type of related party transaction. Luca Enriques, Gerard Hertig, Hideki Kanda and Mariana Pargendler, ‘Related-Party Transactions’, in Reinier Kraakman et al. (eds), The Anatomy of Corporate Law 145, 145 (3rd ed. 2017) (stating that compensation agreements are technically a form of self-dealing). In this article, unless otherwise stated, the term ‘related party transactions’ does not include executive compensation. Rather, they will be treated separately.

16 See, e.g. Andrei Shleifer and Robert W Vishny, ‘A Survey of Corporate Governance’, 52 J. Fin. 737, 754 (1997) (writing that ‘[l]arge shareholders […] address the agency problem in that they both have a general interest in profit maximization, and enough control over the assets of the firm to have their interest respected’).

17 Ronald J Gilson, ‘Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy’, 119 Harv. L. Rev. 1641, 1651 (2006) (stating that ‘[b]ecause she holds a large equity stake, a controlling shareholder is more likely to have the incentive either to monitor managers effectively or to manage the company itself and, because of proximity and lower information costs, may be able to catch problems earlier’); Pierre-Henri Conac, Luca Enriques and Martin Gelter, ‘Constraining Dominant Shareholders’ Self-Dealing: The Legal Framework in France, Germany, and Italy’, 4 ECFR 491, 495 (2007) (expressing that ‘dominant shareholders are in the best position to monitor managers and prevent their opportunism […]’). Limited regulation of directors’ self-dealing in Continental Europe has been associated with the dominance of firms with a controlling shareholder in such jurisdictions where controlling shareholders supposedly play a more than enough monitoring role. See Enriques, supra note 11, at 332.

18 It can also be argued that there might be RPTs that seem value-decreasing at face-value; however, they may be a reward for the performance of directors/managers that cannot be contracted before, thus value-increasing in fact. See Alessio M Pacces, ‘Control Matters: Law and Economics of Private Benefits of Control’ 7 (ECGI Law Working Paper No. 131/2009, 2009) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1448164> (stating that ‘[…] [private benefits of control] extraction [via RPTs] may be efficient […] because the corporate contract is incomplete. When the agent's reward cannot be predetermined for every future state of the world, allowing her to extract private benefits ex-post may be the only way to induce investments that enhance prospective firm value ex-ante, but whose reward for the agent cannot be secured contractually’).

19 There is supporting evidence for such a theory, especially with regard to executive remuneration. See, e.g. Clifford G Holderness, ‘A Survey of Blockholders and Corporate Control’, FRBNY Econ. Pol’y Rev. 51 (Apr. 2003) (reviewing the literature that finds that blockholders monitor the compensation of top executives). See also Jeremy SS Edwards and Alfons J Weichenrieder, ‘Ownership Concentration and Share Valuation’, 5 Ger. Econ. Rev. 143 (2004).

20 Kobi Kastiel, ‘Executive Compensation in Controlled Companies’, 90 Ind. L. J. 1131, 1154 (2015) (stating that ‘controllers and professional CEOs who work together for a long period of time are likely to develop close social and business ties. Such ties, in turn, may negatively influence controllers’ ability to remain unbiased and to have an arm's-length negotiation with professional managers’); id., at 1155 (giving the example of Viacom where the controlling shareholder considers the CEO as the son the controller wishes he had). Furthermore, directors/managers may become a ‘key person’ in the operation of the company, which diminishes the arm's-length negotiation power of the controlling shareholder. On the ‘key person risk’, see Kosmas Papadopoulos, ‘ISS Lists Top 10 Corporate Governance Topics to Watch in 2019’, The CLS Blue Sky Blog (Jan. 11, 2019) <https://clsbluesky.law.columbia.edu/2019/01/11/iss-lists-top-10-corporate-governance-topics-to-watch-in-2019/>.

21 Controlling shareholders can achieve corporate control despite a very low economic stake in the company through dual-class shares, cross-shareholding and pyramid structures. See generally Lucian A Bebchuk, Reiner Kraakman and George Triantis, ‘Stock Pyramids, Cross-Ownership, and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control from Cash-Flow Rights’, in Randall K Morck (ed), Concentrated Corporate Ownership 445 (2000).

22 See, e.g. Henrik Cronqvist and Rüdiger Fahlenbrach, ‘Large Shareholders and Corporate Policies’, 22 Rev. Fin. Stud. 3941 (2009) (studying the effects of blockholder heterogeneity); Steen Thomsen and Torben Pedersen, ‘Ownership Structure and Economic Performance in the Largest European Companies’, 21 Strategic Mgmt. J. 689 (2000) (proposing and supporting ‘the hypothesis that the identity of large owners—family, bank, institutional investor, government, and other companies—has important implications for corporate strategy and performance’); Julian Franks and Colin Mayer, ‘Ownership and Control of German Corporations’, 14 Rev. Fin. Stud. 943 (2001) (studying the ownership of German corporations and finding little association of concentrations of ownership with managerial disciplining).

23 Consider, for example, the above-explained case of Carlos Ghosn. See supra notes 1–9. See also Nan Li, Do Greater Shareholder Voting Rights Reduce Expropriation? Evidence from Related Party Transactions 18–19 (Colum. Bus. Sch. Res. Paper No. 18-26, 2018) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3128408> (explaining United Spirits Ltd. case which similarly involves improper conduct by a powerful director despite the presence of a controlling shareholder).

24 See, e.g. Carsten Gerner-Beurle and Edmund-Philipp Schuster, ‘The Evolving Structure of Directors’ Duties in Europe’, 15 Eur. Bus. Org. L. Rev. 191 (2014).

25 See also Jens Dammann, ‘Corporate Ostracism, Freezing Out Controlling Shareholders’, 33 J. Corp. L. 681, 709–10 (2008) (writing that while the ‘agent [directors/managers] may stand to reap only a small portion of the private benefits that he can extract by abusing the control that he exercises on behalf of his principal [the controller]’, ‘the agent may suffer disproportionately if his wrongdoing is detected’). In fact, the risk of incurring financial losses as a result of shareholder suits for the violation of directors’ fiduciary duties in overseeing the controlling shareholder's self-dealing transactions is small for a number of reasons, such as the rarity of derivative suits in some jurisdictions or D&O insurance in most public companies. See, e.g. Brian R Cheffins and Bernard S Black, ‘Outside Director Liability Across Countries’, 84 Tex. L. Rev. 1385 (2006) (arguing that the out-of-pocket liability risk for outside directors of public companies is similarly very small in many countries). On the other hand, reputational losses can be substantial. See, e.g. Jens Dammann, ‘Related Party Transactions and Intragroup Transactions’, in Luca Enriques and Tobias H Tröger (eds), The Law and Finance of Related Party Transactions 218, 242 (2019) (stating that ‘directors who turn a blind eye on a controlling shareholder's misdeeds may face reputational consequences in the labor market and incur financial losses as a result’). There is also the risk of criminal liability. See, e.g. Enriques, supra note 11, at 317 (noting that under German law, interested directors who deal unfairly with the company and supervisory board members who have approved the transaction with such knowledge may be held criminally liable); Guohua Jiang, Charles MC Lee and Heng Yue, ‘Tunneling Through Intercorporate Loans; The China Experience’, 98 J. Fin. Econ. 1, 19 (2010) (noting disciplinary/criminal consequences for top management as a result of tunnelling activities by controlling shareholders).

26 Value-diversion by the controller will cause a discount in the share price and may affect the performance of the company adversely. See, e.g. Carolina Bona-Sánchez, Carmen Lorena Fernández-Senra and Jerónimo Pérez-Alemán, ‘Related-party Transactions, Dominant Owners and Firm Value’, 20 Bus. Res. Q. 4 (2017) (finding that financial, operating and investment dimensions of RPTs negatively affect firm value due to the presence of an expropriation effect in listed Spanish firms); Michael Ryngaert and Shawn Thomas, ‘Not All Related Party Transactions (RPTs) Are The Same: Ex Ante Versus Ex Post’, 50 J. Acct. Res. 845 (2012) (finding that ex post RPTs (transactions initiated after a counterparty becomes a related party) are significantly negatively associated with operating profitability); Mark Kohlbeck and Brian W Mayhew, ‘Valuation of Firms that Disclose Related Party Transactions’, 29 J. Acct. & Pub. Pol’y 115 (2010) (suggesting that firms that disclose RPTs ‘have significantly lower valuations and marginally lower subsequent returns’ than firms that do not).

27 See also Kastiel, supra note 20, at 1143–44. Furthermore, if directors/managers simultaneously serve in several companies controlled by the same shareholder, controllers may allow such directors/managers to enter into a value-diverting RPT with a controlled company in consideration of acquiescing to minority abuse by the controller in the other controlled company.

28 Id., at 1142 (stating that ‘controllers may be willing to pay professional managers extra compensation in exchange for their collusion with controllers’ extraction of private benefits and as a premium for their loyalty to the controllers’). See also infra note 32 and cited sources therein.

29 See also Lars Norden and Therese Strand, ‘Shareholder Activism Among Portfolio Managers: Rational Decisions or 15 Minutes of Fame?’, 15 J. Mgmt. Gov. 375 (2011) (finding that large media coverage (which is likely for executive compensation in large public companies) results in institutional investors being more active in portfolio companies).

30 See also Assaf Hamdani and Yishay Yafeh, ‘Institutional Investors as Minority Shareholders’, 17 Rev. Fin. 691, 704 (2013) (stating that ‘identifying expropriation in what appears to be a legitimate business transaction may require careful analysis, whereas the amount of transfer from the company to its executives in a compensation arrangement is easier to quantify and trigger the media's attention’).

31 See, e.g. Enriques et al., supra note 15, at 147–52 (detailing disclosure requirements on executive remuneration and RPTs in various jurisdictions). Furthermore, ‘say-on-pay’ provisions which at least grant shareholders advisory vote on executive remuneration are very common while disinterested shareholder vote on RPTs (also known as ‘MOM approval’) remains the norm only in a handful of countries. See Randall S Thomas and Christoph Van Der Elst, ‘Say On Pay Around the World’, 92 Wash. U. L. Rev. 653 (2015) (examining say on pay legislation across many countries); OECD, Related Party Transactions and Minority Shareholder Rights 32–33 (2012) (showing jurisdictions with a disinterested shareholder vote requirement for RPTs).

32 It is also referred to as ‘collusion hypothesis’. For empirical evidence in support (this evidence also relates to executive remuneration as a way to ‘reward’ directors/managers for their collusion with the controller's tunnelling), see Kastiel, supra note 20, at 1162 (of companies that received negative ISS recommendation in say-on-pay votes, 63.4% were involved in RPTs with their controllers); Min Zhang, Shenghao Gao, Xinjiao Guan and Fuxiu Jiang, ‘Controlling Shareholder-Manager Collusion and Tunneling: Evidence from China’, 22 Corp. Gov. Int’l Rev. 440 (2014) (finding that controlling shareholders with excess control rights collude with managers by weakening performance-based incentives and finding preliminary evidence for rent-sharing behaviour between controlling shareholders and managers); Kun Wang and Xing Xiao, ‘Controlling Shareholders’ Tunneling and Executive Compensation: Evidence from China’, 30 J. Acct. & Pub. Pol’y 89 (2011) (suggesting that ‘[…] controlling shareholders who obtain private benefits from listed companies have less incentive to strengthen the relationship between executive pay and firm performance’); Yongli Luo and Dave O Jackson, ‘CEO Compensation, Expropriation, and the Balance of Power Among Large Shareholders’, in Stephen P Ferris, Kose John and Anil K Makhija (eds), 15 Advances in Fin. Econ. 195, 231 (2012) (showing that ‘there is a strong positive relationship between executive compensation and a controlling shareholder's tunnelling’); Roberto Barontini and Stefano Borzi, ‘Board Compensation and Ownership Structure: Empirical Evidence for Italian Listed Companies’, 15 J. Mgmt. & Gov. 59, 84 (2011).

33 See also infra note 114.

34 Lucian A Bebchuk and Assaf Hamdani, ‘The Elusive Quest for Global Governance Standards’, 157 U. Pa. L. Rev. 1263, 1306 (2009) (stating that ‘[t]he constraints on [related party transactions] […] might be vital for [controlled companies] […] but they are far less important for assessing governance at [dispersedly-owned companies] […]’); María Gutiérrez and María Isabel Sáez, ‘A Contractual Approach to Disciplining Self-dealing By Controlling Shareholders’, 2 J. L. Fin. & Acct. 173, 197 (2017) (stating that ‘[m]anagers usually obtain private benefits via remuneration contracts, while controlling shareholders mostly obtain private benefits through self-dealing operations […]’). See also María Gutiérrez and Maribel Sáez, ‘Deconstructing Independent Directors’, 13 J. Corp. L. Stud. 63, 74 (2013) (writing that ‘it is important to note that the inefficiencies caused by the managers–shareholders conflict do not exactly match the problems generated by controlling shareholders’); Zohar Goshen and Assaf Hamdani, ‘Corporate Control and Idiosyncratic Vision’, 125 Yale L. J. 560, 582 (2016) (expressing that in the typical case of a widely held public company, mismanagement dominates takings (which include conducting favourable RPTs) in terms of agency costs). Cf. Victor Brudney, ‘Revisiting the Import of Shareholder Consent for Corporate Fiduciary Loyalty Obligations’, 25 J. Corp. L. 209, 212, fn. 12 (2000) (writing that ‘[t]hat protection of public investors from predation by controllers requires firm restrictions does not lessen the former's need for such protection from managers’).

35 Bebchuk and Hamdani, supra note 34, at 1283. Cf. Luca Enriques, ‘Related Party Transactions: Policy Options and Real-World Challenges (with a Critique of the European Commission Proposal)’, 16 Eur. Bus. Org. L. Rev. 1, 6, fn. 22 (2015) (stating that ‘there is no reason, why, other things equal, managers should prefer excessive compensation to RPTs as a tunneling technique’).

36 See supra note 31.

37 See, e.g. Lucian Arye Bebchuk, Jesse M Fried and David I Walker, ‘Managerial Power and Rent Extraction in the Design of Executive Compensation’, 69 U. Chi. L. Rev. 751, 753 (2002) (stating that ‘[e]xecutive compensation has long attracted a great deal of attention from academics, the media, Congress, and the public at large’).

38 Donations by the company to directors’ preferred charitable organizations or sponsoring by the company of directors’ preferred events or organizations also constitute an important agency problem. See Faith Stevelman Kahn, ‘Pandora's Box: Managerial Discretion and the Problem of Corporate Philanthropy’, 44 UCLA L. Rev. 579 (1997); Jayne W Barnard, ‘Corporate Philanthropy, Executives’ Pet Charities and the Agency Problem’, 41 N. Y. L. Sch. L. Rev. 1147 (1997); Roy Shapira, ‘Corporate Philanthropy as Signaling and Co-Optation’, 80 Fordham L. Rev. 1889 (2012). These donations are very similar to RPTs in terms of agency cost paradigm: while unfair RPTs provide pecuniary private benefits (although not exclusively), corporate philanthropy serves as a non-pecuniary private benefit of control for managers/directors. So, in this context, one may ask whether to include such donations within the framework of RPT regulation.

39 Jurisdictions regulate however to what extent directors/managers of a company can serve in similar posts in other companies, especially prohibiting competition with the company. See, e.g. Gerner-Beurle and Schuster, supra note 24, at 211 ff. Cf. Yaron Nili, ‘Horizontal Directors’, 114 Nw. U. L. Rev. 1179 (2020) (revealing ‘the staggering number of directors who serve on the boards of two or more companies operating within the same industry’).

40 See also Atanasov, Black and Ciccotello, supra note 10, at 25 ff. (providing examples of such tunnelling cases).

41 For a similar study, see Andreas Engert and Tim Florstedt, ‘Which Related Party Transactions Should Be Subject To Ex Ante Review? Evidence From Germany’, 20 J. Corp. L. Stud. 263 (2020) (while focusing on large RPTs with major shareholders and downstream entities, also offering a glance at the incidence and magnitude of companies’ dealings with managers for listed companies in Germany for the year of 2017). See also Geneviève Helleringer, ‘Related Party Transactions in France: A Critical Assessment’, in Luca Enriques and Tobias H Tröger (eds), The Law and Finance of Related Party Transactions 400, 407, fn. 37 (2019) (citing studies which examine the 120 largest listed companies (by market capitalisation and trading volume) on the Paris Stock Exchange and finding that ‘RPTs are mainly entered into with managers or with a company that has a common board member or manager; RPTs entered into with a board member (e.g. consulting contracts) are less frequent’); Christoph Van der Elst, ‘The Duties of Significant Shareholders in Transactions with the Company’, in Hanne S Birkmose (ed), Shareholders’ Duties 199 (2017) (studying the disclosures of shareholder's transactions with the company of the Stoxx Europe Small 200 Index).

42 In the EU, disclosure requirements have been largely harmonized through various Directives. The Accounting Directive requires the disclosure of RPTs in the notes to the financial statements, allowing however Member States to require or permit companies to disclose all material RPTs that have not been concluded on ‘normal market conditions’. See Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, 2013 O.J. (L 182), art. 17/(1)/(r). The Transparency Directive provides for a half-yearly disclosure of ‘major related parties transactions’. See Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, 2004 O.J. (L 390), art. 5/(4); Commission Directive 2007/14/EC of 8 March 2007 laying down detailed rules for the implementation of certain provisions of Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, 2007 O.J. (L 69), art. 4. Lastly, alongside ex post disclosure of RPTs in financial statements, listed companies are required by the recent Shareholders’ Rights Directive II to disclose material RPTs at the latest at the time of the conclusion of the transaction (real-time ad hoc disclosure). See Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, 2017 O.J. (L 132), art. 9c/(2) [hereinafter Shareholders’ Rights Directive II].

43 International Financial Reporting Standards in general and IAS 24 in particular became applicable for publicly traded firms in Member States through Commission Regulation (EC) No. 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No. 1606/2002 of the European Parliament and of the Council, 2008 O.J. (L 320).

44 IAS 24, para. 9 defines ‘key management personnel’ as ‘those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity’.

45 IAS 24, paras. 9&18. Para. 19 requires separate disclosure for each of the following categories: the parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures, key management personnel, and other related parties.

46 IAS 24, para. 18.

47 IAS 24, para. 24.

48 IAS 1, para. 31 (stating that ‘a specific disclosure requirement in a standard or an interpretation need not be satisfied if the information is not material’).

49 The financial year of some companies does not match with the calendar year. For these companies, the annual reports of 2017/18 and 2018/19 have been examined.

50 See <https://www.deutsche-boerse-cash-market.com/dbcm-en/instruments-statistics/statistics/listes-companies> accessed 27 March 2020. For the different listing segments in Deutsche Börse with different requirements, see <https://www.deutsche-boerse-cash-market.com/dbcm-en/primary-market/market-structure/segments> accessed 13 October 2020.

51 German stock corporations (‘Aktiengesellschaft’ – ‘AG’) have a (mandatory) two-tier board structure and thus ‘key management personnel’ entail supervisory (Aufsichtsrat) and management (Vorstand) board members. For the board structure of German companies, see Markus Roth, ‘Corporate Boards in Germany’, in Paul Davies, Klaus Hopt, Richard Nowak and Gerard van Solinge (eds), Corporate Boards in Law and Practice: A Comparative Analysis in Europe 253 (2013). Some companies incorporated as ‘societas europaea’ (‘SE’), which gives the option of choosing between a two-tier and one-tier board structure. See Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), 2001 O.J. (L 294), art. 38. The rest (mainly non-German companies which listed on Deutsche Börse) have either one-tier or two-tier board structure.

52 In collecting RPTs by these related parties, I only considered transactions that were entered into in the pertinent financial year or created expense/income for that financial year albeit being entered into in another financial year. This meant that while some previous transactions that were reported to show (remaining) receivables/liabilities from the transaction (like loans) in the relevant financial year were ignored, continuous transactions (like consultancy agreements) were coded in the dataset separately for each year.

53 Employment contracts with family members of directors/managers (rather than with themselves) were included in the dataset.

54 For example, to understand whether the director/manager in question is also a major shareholder or to understand whether the entities that are identified as related party (without disclosing why/how) are a related party because of a connection to a director/manager.

55 According to section 33 of German Securities Trading Act (‘Wertpapierhandelsgesetz’ – ‘WpHG’), any party whose shareholding in an issuer whose home country is the Federal Republic of Germany reaches, exceeds or falls below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of the voting rights attaching to shares must notify this to the issuer and simultaneously to Federal Financial Supervisory Authority (‘Bundesanstalt für Finanzdienstleistungsaufsicht’ – ‘BaFin’) without undue delay, and at the latest within four trading days. See § 33/(1) Wertpapierhandelsgesetz. Section 160 of German Stock Corporation Act (‘Aktiengesetz’ – ‘AktG’) in turn requires such notifications to be published in the annual reports. See § 160/(1)/(8) Aktiengesetz. Furthermore, sections 289a and 315a of German Commercial Code (‘Handelsgesetzbuch’ – ‘HGB’) require direct or indirect interests in the share capital exceeding 10% of the voting rights to be disclosed in the annual reports. See §§ 289a/(1)/(3) & 315a/(1)/(3) Handelsgesetzbuch.

56 For this reason, changes in the shareholding percentages after the balance sheet date were not considered (even though reported by the companies in the annual reports as such).

57 BaFin provides a database of major holdings of voting rights in issuers whose home state is Germany based on publications and notifications of voting rights according to WpHG. See <https://www.bafin.de/EN/PublikationenDaten/Datenbanken/Stimmrechte/stimmrechte_node_en.html> accessed 13 October 2020.

58 Shareholding and voting rights of a shareholder might differ because of the existence of shares granting different voting rights or of voting rights attached to other instruments than shares.

59 In determining the major shareholding and its percentage, several rules were followed. Holdings of the same entity/individual (i.e. direct and indirect holdings) were aggregated. Pooling agreements between different shareholders regarding the voting rights were also considered. Such agreements have to be disclosed in annual reports according to sections 289a and 315a of German Commercial Code. See §§ 289a/(1)/(2) & 315a/(1)/(2) Handelsgesetzbuch. Insofar as such agreements require voting rights to be exercised uniformly, such shareholdings were also aggregated.

60 See, e.g. Enriques, supra note 35, at 28 (stating that ‘[a] standard, like the notion of materiality, will give corporate decision-makers wide discretion in determining what to include and, if the rationale is the risk of tunneling, may prove self-defeating, because no insider will be happy to confess that the company is doing something that may indeed be judged as tunneling-prone’).

61 Two companies disclosed direct transactions between the controlling interest and members of management board. Similarly, another set of two companies reported transactions with managers/directors after they left the company.

62 IAS 24, para. 24 allows items of a similar nature to be disclosed in aggregate except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the entity.

63 ‘DAX tracks the performance of the 30 largest and most liquid companies on the German stock market, representing approximately 80 per cent of the aggregate market capitalisation of listed German stock corporations’. See <https://www.deutsche-boerse.com/dbg-en/our-company/30-facts-about-30-years-of-DAX-29994> accessed 23 March 2021.

64 ‘The MDAX index […] comprises the 60 medium-sized German public limited companies from all industries that rank directly below the 30 DAX® equities based on market capitalisation and order book turnover’. See <https://www.dax-indices.com/index-details?isin=DE0008467416> accessed 23 March 2021.

65 ‘The SDAX index comprises 70 German public limited companies from all industries that rank directly below the MDAX® equities based on market capitalisation and order book turnover’. See <https://www.dax-indices.com/index-details?isin=DE0009653386> accessed 23 March 2021.

66 Data are based on the composition of indices as they stood on Dec. 31, 2018 (time-adjusted composition of the index is available at <https://www.dax-indices.com/composition> accessed 23 March 2021).

67 Germany as a jurisdiction has traditionally been included in the group of countries with concentrated ownership of company shares. See, e.g. Jeremy Edwards, Marcus Nibler, Erik Berglöf and Julian Franks, ‘Corporate Governance in Germany: The Role of Banks and Ownership Concentration’, 15 Econ. Pol’y 237 (2000); Franks and Mayer, supra note 22. Cf. Wolf-Georg Ringe, ‘Changing Law and Ownership Patterns in Germany: Corporate Governance and the Erosion of Deutschland AG’, 63 Am. J. Comp. L. 493 (2015) (arguing that ownership is diffusing, especially with regard to DAX companies).

68 Similarly, in the dataset of 2019 consisting of 303 companies, 254 companies have at least one blockholder with 10% or above shareholding, meaning that only 16% of the companies in the dataset have no such a blockholder. Companies with a blockholder with a shareholding of 50% or above comprise 34% of the dataset (102 out of 303 companies). Considering the companies with a blockholder with a shareholding of 25% or above, this number increases to 64% (193 out of 303 companies).

69 In the dataset of 2019, 17 companies in the DAX index have no blockholder with a shareholding of 10% or above. Furthermore, MDAX and SDAX indices, which consist of companies that rank directly below DAX companies based on market capitalisation (and order book turnover) include a significant number of companies with no blockholder with a shareholding of 10% or above. See supra notes 64 & 65 and Figure 2.

70 With regard to states as ‘controllers’ see, e.g. Pursey PMAR Heugens, Steve Sauerwald, Roxana Turturea and Marc van Essen, ‘Does State Ownership Hurt or Help Minority Shareholders? International Evidence From Control Block Acquisitions’, 10 Global Strategy J. 750 (2020); Curtis J Milhaupt and Mariana Pargendler, ‘Related Party Transactions in State-Owned Enterprises: Tunneling, Propping, and Policy Channeling’, in Luca Enriques and Tobias H Tröger (eds), The Law and Finance of Related Party Transactions 245 (2019). On the benefits of family ownership, see Dušan Isakov and Jean-Philippe Weisskopf, ‘Are Founding Families Special Blockholders? – An Investigation of Controlling Shareholder Influence on Firm Performance’, 41 J. Banking & Fin. 1 (2014); Ronald C Anderson and David M Reeb, ‘Founding-Family Ownership, Corporate Diversification, and Firm Leverage’, 46 J. L. & Econ. 653 (2003); Ronald C Anderson and David M Reeb, ‘Founding-Family Ownership and Firm Performance: Evidence from the S&P 500’, 58 J. Fin. 1301 (2003).

71 See, e.g. Belen Villalonga and Raphael Amit, ‘How Do Family Ownership, Control and Management Affect Firm Value?’, 80 J. Fin. Econ. 385 (2006) (finding that ‘family ownership creates value only when the founder serves as CEO of the family firm or as Chairman with a hired CEO’ and ‘[w]hen descendants serve as CEOs, firm value is destroyed’); Brian F Smith and Ben Amoako-Adu, ‘Management Succession and Financial Performance of Family Controlled Firms’, 5 J. Corp. Fin. 341 (1999) (examining management successions within Canadian family controlled firms and observing negative market reaction to the appointment of family successors); Francisco Pérez-González, ‘Inherited Control and Firm Performance’, 96 Am. Econ. Rev. 1559 (2006) (finding that ‘firms where incoming CEOs are related to the departing CEO, to a founder, or to a large shareholder by either blood or marriage underperform in terms of operating profitability and market-to-book ratios, relative to firms that promote unrelated CEOs’).

72 See, e.g. Marcel Kahan and Edward B Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’, 155 U. Pa. L. Rev. 1021 (2007); LAA Van den Berghe and Abigail Levrau, ‘The Role of the Venture Capitalist as Monitor of the Company: a corporate governance perspective’, 10 Corp. Gov. Int’l Rev. 124 (2002); Nicholas Bloom, Raffaella Sadun and John Van Reenen, ‘Do Private Equity Owned Firms Have Better Management Practices?’, 105 Am. Econ. Rev. 442 (2015).

73 Those who manage the funds on behalf of beneficial owners will be entitled to a percentage of assets under management as a fee (‘flat fee’). This percentage will be generally very small, giving very little exposure to the value of assets under management. See, e.g. Lucian A Bebchuk, Alma Cohen and Scott Hirst, ‘The Agency Problems of Institutional Investors’, 31 J. Econ. Persp. 89 (2017). Yet, if there is an arrangement based on ‘performance fee’, the exposure increases substantially. See, e.g. Edwin J Elton, Martin J Gruber and Christopher R Blake, ‘Investment Fees and Mutual Funds’, 58 J. Fin. 779 (2003). On the governance role of institutional investors, see generally Edward Rock, ‘Institutional Investors in Corporate Governance’, in Jeffrey N Gordon and Wolf-Georg Ringe (eds), The Oxford Handbook of Corporate Law and Governance 363 (2018); Ronald J Gilson and Jeffrey N Gordon, ‘The Agency Costs of Agency Capitalism; Activist Investors and The Revaluation of Governance Rights’, 113 Colum. L. Rev. 863 (2013).

74 For example, assume that a shareholder owns 60% of shares of Company Y which in turn owns a controlling interest of 60% in the listed Company X. This shareholder will ultimately have 36% economic stake in the Company X (60%*60%). However, if instead Company Y is widely-held, its directors/managers will have much smaller economic exposure to the value of the controlled Company X.

75 For a similar finding, see Holderness, supra note 19, at 53.

76 ‘Common ownership’ denotes the phenomenon that the shares of many listed companies (especially competitors) are jointly held by a small group of institutional investors. The main concern appears to be the potential anticompetitive effects stemming from such a phenomenon. But the matter is highly controversial. See, e.g. José Azar, Martin C Schmalz and Isabel Tecu, ‘Anticompetitive Effects of Common Ownership’, 73 J. Fin. 1513 (2018); Martin C Schmalz, ‘Common-Ownership Concentration and Corporate Conduct’, 10 Annu. Rev. Fin. Econ. 413 (2018); Einer Elhauge, ‘Horizontal Shareholding’, 109 Harv. L. Rev. 1267 (2016); cf. Patrick Dennis, Kristopher Gerardi and Carola Schenone, Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry (FRB Atlanta Working Paper No. 2019-15, 2019) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423505>; C Scott Hemphill and Marcel Kahan, ‘The Strategies of Anticompetitive Common Ownership’, 129 Yale L. J. 1392 (2020). See also Alec J Burnside and Adam Kidane, ‘Common Ownership: An EU Perspective’, J. Antitrust Enforcement 1 (2020) (stating that available evidence suggests that levels of common ownership in Europe are not comparable to those in the US).

77 See above Part B.

78 Similarly, for the year of 2019, out of 301 listed companies, 195 companies did not report any RPT with a director/manager who is not also a significant/controlling shareholder or with a related entity due to a link to these persons. 12 cases were classified unclear due to one of the abovementioned reasons. In contrast, the remaining 94 companies disclosed RPT(s) with a director/manager who is not also a significant/controlling shareholder or with a related person/entity due to a link to these persons.

79 For the dataset of 2019, there is a similar distribution: 10 companies in the interval of <10%; 24 companies in the interval of [10%–25%); 25 companies in the interval of [25%–50%); 24 companies in the interval of [50%–75%); 11 companies in the interval of ≥75%.

80 For the dataset of 2019, there is a more or less similar picture: 20% (10 out of 49) for the companies in the interval of <10%; 39% (24 out of 61) for the companies in the interval of [10%–25%); 27% (25 out of 91) for the companies in the interval of [25%–50%); 33% (24 out of 73) for the companies in the interval of [50%–75%); 38% (11 out of 29) for the companies in the interval of ≥75%.

81 For the dataset of 2019, there is a similar distribution: 41 RPTs in the category of ‘purchase or sale of goods or services’; 21 RPTs in the category of ‘consulting’; 8 RPTs in the category of ‘loan and similar arrangements’; 6 RPTs in the category of ‘legal’; 8 RPTs in the category of ‘rent/lease agreements’; 14 RPTs in the category of ‘other’; 17 RPTs in the category of ‘unclear’.

82 In addition, in the case of companies that disclosed more than one relevant RPT, some companies did not disclose clearly the values of all relevant RPTs that they reported.

83 As regards the ongoing loan arrangements, I considered the outstanding amount in the reporting year as the relevant amount (also adding any reported interest expense/income for that year).

84 For the year of 2019, the largest value disclosed by a company amounts to €101,775,000 while the smallest amount is €10,000. The mean value of transactions is €3,313,375 while the median value is equal to €318,500. These figures only relate, however, to RPTs disclosed by 70 companies out of 94 reporting companies because for the remaining 24 companies, the values of RPTs were not clear.

85 Taking the cynical view, one would be sceptical of stated values of RPTs, as these values may not reflect the true impact of the transaction on the company in the case of value-diversion, and insiders may try to evade review by undercutting materiality thresholds.

86 It is debatable whether one should take such statements at face value, considering that only few companies actually attest to the fairness of transactions by an independent third-party opinion. On the other hand, IAS 24, para. 23 requires that ‘[d]isclosures that related party transactions were made on terms equivalent to those that prevail in arm's length transactions are made only if such terms can be substantiated’.

87 Actually, IAS 24, para. 11 does not require the disclosure of transactions between ‘two entities simply because they have a director or other member of key management personnel in common or because a member of key management personnel of one entity has significant influence over the other entity’. Yet, such transactions are typically considered as self-dealing transactions. See Robert C Clark, Corporate Law 159 (1986).

88 Engert & Florstedt, supra note 38, at 6.

89 Relevant figures regarding ‘book equity’, ‘profits’, ‘total assets’ and ‘turnover’ of the reporting company have been extracted from the DAFNE database as they stood at the end of the reporting period (2018).

90 On the UK regime, see Paul Davies, ‘Related Party Transactions: UK Model’, in Luca Enriques and Tobias H Tröger (eds), The Law and Fınance of Related Party Transactıons 361 (2019).

91 These RPT rules (implementing the Shareholders’ Rights Directive II) can be found at §§ 111a-c Aktiengesetz.

92 A more or less similar picture also emerges for the companies in the dataset of 2019. 34% of the companies where a shareholder has absolute control (with a shareholding of 50% or above) disclosed at least an RPT with directors/managers who are not significant/controlling shareholder or with their related entities (35 out of 102 companies). If one rather considers companies with a blockholder with a shareholding of 25% and above, 31% of these companies reported such an RPT (60 out of 193 companies). This figure slightly rises to 33% if one also includes companies with a blockholder with a shareholding between 10% and 25% (84 out of 254 companies).

93 As expected, however, self-dealing by the largest shareholders is more common: 56% – 138 out of 247 companies with a blockholder with a shareholding above 10%.

94 See supra note 25.

95 Furthermore, as mentioned above, even if RPTs are not value-diverting, they can still provide some financial benefits for directors/managers (as quid pro quo for acquiescing to the controller's abuse). See text accompanying supra notes 31–32.

96 Where the identity of the related party was clear, the remuneration of that director/manager as reported in the same annual report was considered. When it was not clear, the average remuneration of a board member (depending on whether the related party is a member of management or supervisory board) was calculated and considered. When transaction values with directors/managers were disclosed in an aggregate way, aggregate remuneration of board members (again, depending on whether the related party is a member of management or supervisory board) was calculated and considered (which may result in the overstatement of the relevant remuneration value in some cases). In some cases, general terms encompassing both supervisory and management members (such as ‘key management personnel’ or ‘directors’) were used. These cases are depicted under the category of ‘other’ in the chart. Some companies are lacking because either the RPT values or the values of remuneration packages were not clear. Companies with concentrated ownership indicate those with a blockholder with a shareholding above 10% minus those where the blockholder(s) only marginally exceed(s) the ten percent threshold and thus the ownership cannot be reasonably deemed concentrated.

97 See Roth, supra note 51, at 283 (‘[t]he supervisory board has to monitor the running of the affairs of the corporation. This is a core duty of the supervisory board explicitly stipulated in the legislation and one of the primary functions of the supervisory board’); Klaus J Hopt, The German Law of and Experience with the Supervisory Board 12 (ECGI Law Working Paper No. 305/2016, 2016) (stating that ‘the supervisory board has been characterized as a “co-deciding control organ”’). Supervisory board is the organ with the task of enforcing the claims of company against insiders. See id., at 13 (noting that in cases where insiders have violated their duties against the company, ‘the supervisory board is usually under a legal obligation to enforce the liability claim of the company before the courts’).

98 See in this regard, Markus Roth, ‘Outside Director Liability: German Stock Corporation Law in Transatlantic Perspective’, 8 J. Corp. L. Stud. 337 (2008) (stating that ‘[s]upervisory directors have been held liable in an increasing number of cases in the last 10 years’); Hopt, supra note 97, at 14–15. In German law, any distribution of corporate assets to shareholders (except for dividend payments) is prohibited. See § 57 Aktiengesetz. The concept of distribution also includes transactions that transfer value from the corporation to shareholders. See Tim Drygala, § 57 paras. 37–94, Kölner Kommentar zum Aktiengesetz [Cologne Commentary on The Stock Corporation Act] (Wolfgang Zöllner and Ulrich Noack eds, 3rd ed. 2011). Directors (on the supervisory board) that execute the hidden distributions are personally liable as there arises a violation of directors’ duties. See §§ 93/(3)/(1) and 116 Aktiengesetz. Furthermore, the criminal offense of Untreue in § 266 Strafgesetzbuch, which punishes any person that abuses the power accorded to him or her to dispose of the assets of, or make binding agreements for another person, or violates his or her duty to safeguard the property interests of another person when there arise damages as a result, may lead to criminal liability for supervisory (and management) board members. See also Conac, Enriques and Gelter, supra note 17, at 520.

99 This includes companies with a blockholder with a shareholding above 10% minus those where the blockholder(s) only marginally exceed(s) the ten percent threshold and thus the ownership cannot be reasonably deemed concentrated.

100 It is important to keep in mind that abuse of control by controlling shareholders can happen in a variety of ways (not only through RPTs) such as compensation packages & miscellaneous perks and taking of opportunities.

101 See the text between supra notes 74 and 75.

102 See, e.g. Gilson, supra note 17, at 1649 and cited sources therein; Randall Morck, Daniel Wolfenzon and Bernard Yeung, ‘Corporate Governance, Economic Entrenchment, and Growth’, 43 J. Econ. Lit. 655, 678–79 (2005).

103 In 2019, out of 79 companies which disclosed relevant RPT(s) with directors/managers and have concentrated ownership, in 57 companies, there was chain(s) of share-ownership.

104 See Olaf Ehrhardt and Eric Nowak, ‘Private Benefits of Control in Founding-Family Owned Firms: An Analysis of the Dynamics of Disproportionate Ownership and Control in Family Firm Ipos’ (July 1, 2015) <https://ssrn.com/abstract=423506> (examining private benefits of control in founding-family owned firms on German stock exchanges from 1970 to 2011 and showing that substantial private benefits of control exist in these firms); Randall Morck and Bernard Yeung, ‘Agency Problems in Large Family Business Groups’, 27 Entrepreneurship Theory & Prac. 367 (2003); Marianne Bertrand, Paras Mehta and Sendhil Mullainathan, ‘Ferreting Out Tunneling: An Application to Indian Business Groups’, 117 Q. J. Econ. 121 (2002).

105 Matching the companies from the DAXplus Family-Index with the companies in the dataset, a similar picture emerges: in 2018, out of 83 companies in both said index and dataset, 35 companies disclosed at least an RPT with directors/managers who are not significant/controlling shareholders or with their related entities/persons, which corresponds to 42.17%. DAXplus Family-Index tracks the performance of family-run companies listed on the prime standard of Deutsche Börse. The selection criteria for the index (which is different to the categorisation used in this article) are as follows: (a) the founding family or families hold directly or indirectly at least 25% of the voting rights or (b) the same sit on the management or supervisory board and hold at least 5% of the voting rights. See <https://www.dax-indices.com/index-details?isin=DE000A0YKTL4> accessed 11 April 2021. The composition of the index changes over time. For the purposes of this study, the composition as it stood on February 2020 was considered (time-adjusted composition of the index is available at <https://www.dax-indices.com/composition> accessed 11 April 2021).

106 See the text accompanying supra notes 71–74.

107 See the text between supra notes 74–75.

108 For the year of 2018, 60 out of 82 companies and for the year of 2019, 57 out of 79 companies. See also supra note 103 and accompanying text.

109 These companies include those with no blockholder with a shareholding of 10% or above plus those where the ownership can still be reasonably deemed as dispersed because the blockholder exceeds the 10% threshold only marginally.

110 For the dataset of 2019, this percentage decreases to 23% (15 out of 65 companies).

111 As to how this comparison is made, see supra note 96.

112 See Atanasov, Black and Ciccotello, supra note 10, at 6–7 (defining cash flow tunnelling as ‘transactions which divert what would otherwise be operating cash flow from the firm to insiders […]’ and giving the example of selling/buying goods or services to/from insiders at below-market/above-market prices).

113 See also Atanasov, Black and Ciccotello, supra note 10, at 41 (noting that corporations do not effectively disclose self-dealing and echoing the need for more complete disclosure, and for a broader range of related-party asset sales and purchases); Kastiel, supra note 20, at 1174 (proposing an enhanced disclosure regime).

114 Considering the current legal regime, it appears that some jurisdictions treat directorial/managerial self-dealing differently from the controller's self-dealing. For example, according to Delaware law, while the approval of independent directors or disinterested shareholders only shifts the burden of proof in the case of court review of an RPT by the controlling shareholder, such approval enables managerial/directorial RPTs to be reviewed under the business judgement rule. See Dammann, Related Party Transactions and Intragroup Transactions, supra note 25, at 236. Belgium is another example. See Enriques, supra note 35, at 19.

115 Admittedly, independent directors are no panacea to the tunnelling problem in public companies. But there is evidence showing beneficial effects. See, e.g. Bernard S Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, ‘How Corporate Governance Affect Firm Value? Evidence on a Self-Dealing Channel From A Natural Experiment in Korea’, 51 J. Banking & Fin. 131 (2015) (utilizing a Korean legal reform in 1999 that improved board independence of ‘large’ firms, and showing that large firms whose controllers have incentive to tunnel earn strong positive returns, relative to mid-sized firms); Jay Dahya, Orlin Dimitrov and John J McConnell, ‘Dominant Shareholders, Corporate Boards, and Corporate Value: A cross-country Analysis’, 87 J. Fin. Econ. 73 (2008) (investigating the relation between corporate value and the proportion of the board made up of independent directors in 799 firms with a dominant shareholder across 22 countries, and finding a positive relation, especially in countries with weak legal protection for shareholders).

116 Harald Baum, ‘The Rise of the Independent Director: A Historical and Comparative Perspective’ (Max Planck Institute for Comp. & Int’L Private Law Research Paper Series No. 16/20, 2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814978&download=yes (noting the export of the concept of the independent director from the US and the UK to the world); Guido Ferrarini and Marilena Filippelli, ‘Independent Directors and Controlling Shareholders Around the World’, in Research Handbook on Shareholder Power 269, 269 (2015) (stating that ‘[i]ndependent directors originated in dispersed ownership systems in order to strengthen the monitoring role of the board’).

117 See, e.g. Lucian A Bebchuk and Assaf Hamdani, ‘Independent Directors and Controlling Shareholders’, 165 U. Pa. L. Rev. 1271 (2017); Wolf-Georg Ringe, ‘Independent Directors: After the Crisis’, 14 Eur. Bus. Org. L. Rev. 401 (2013); Gutiérrez and Sáez, supra note 34.

118 See, e.g. Enriques, supra note 35, at 18; Enriques et al., supra note 15, at 153.

119 See, e.g. Bebchuk and Hamdani, supra note 117; Gutiérrez and Sáez, supra note 34; Ringe, supra note 117; Alessio M Pacces, ‘Procedural and Substantive Review of Related Party Transactions: The Case for Noncontrolling Shareholder-Dependent Directors’, in Luca Enriques and Tobias H Tröger (eds), The Law and Finance of Related Party Transactions 181 (2019).

120 On the enforcement of the duty of loyalty before the courts, see Enriques et al., supra note 15, at 164–65. See also Martin Gelter, ‘Why Do Shareholder Derivative Suits Remain Rare in Continental Europe?’, 37 Brook. J. Int’l L. 843 (2012).

121 See Enriques, supra note 35, at 18. See also Shareholders’ Rights Directive II, supra note 42, art. 9c/(1).

122 See, e.g. Shareholders’ Rights Directive II, supra note 42, art. 9c/(4) (excluding the controlling shareholder from the vote only when the transaction involves him/her). Similarly, in the UK, where the companies in the premium listing need to submit material RPTs to the shareholder vote, the related party (and his/her associates) is excluded from the vote, meaning that controlling shareholder cannot vote only when he/she is the related party. See Financial Conduct Authority, Listing Rules (Oct. 2020) https://www.handbook.fca.org.uk/handbook/LR.pdf.

123 See similarly Kastiel, supra note 20, at 1166–69 (discussing the need to eliminate the controlling shareholders’ absolute influence over the executive compensation arrangements).

124 In a few jurisdictions, rules that apply to directorial/managerial self-dealing and rules that concern controlling shareholders’ self-dealing differ. See supra note 114.

125 See Louis D Brandeis, ‘Other People’s Money and How the Bankers Use It’ 92 (1914).

126 See Mark J Roe and Massimiliano Vatiero, ‘Corporate Governance and Its Political Economy’, in Jeffrey N Gordon and Wolf-Georg Ringe (eds), The Oxford Handbook of Corporate Law and Governance 56, 75 (2018). The latest iteration of this phenomenon can be observed in the legislative process of the Shareholders’ Rights Directive II with regard to RPTs where there was a significant backlash from the business community against the original proposal which was much stricter than the final Directive. See also Luca Enriques, ‘A Harmonized European Company Law: Are We There Already?’, 66 Int’l & Comp. L. Q. 763, 770 (2017).

127 See similarly Enriques, supra note 11, at 332–33 (arguing that dominant stockholders will have a strong incentive to lobby against more stringent self-dealing regulations, even if aimed at only directors’ opportunism, because rules addressing directors’ self-dealing may easily curb majority stockholders’ opportunism).

128 Atanasov, Black and Ciccotello, supra note 10, at 42 (stating that ‘[tunnelling] opportunities exist and are sometimes exploited’).

Additional information

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Alperen Afşin Gözlügöl

Alperen Afşin Gözlügöl is currently a PhD Researcher at Faculty of Law, University of Hamburg, Germany. The author obtained his B.A. in law from Bilkent University, Ankara, Turkey and his LL.M. from University of Cambridge, UK with first class honours. The author currently researches in the fields of corporate governance and comparative company law. See also www.linkedin.com/in/alperen-afşin-gözlügöl-4712a3168.