Controlling Tunneling Through Lending Arrangements

In a recent article, I examine how common provisions in lending arrangements (drawing from the LMA and LSTA modal agreements) handle the problem of value diversion in debtor companies. “Tunneling,” which is the expropriation of company value by corporate insiders (Johnson et al. 2000), has been largely considered a problem mainly for (minority) shareholders, as residual claimants. With fixed claims, creditors are typically not concerned with value diversion unless the debtor approaches insolvency. Yet my analysis shows that lending arrangements – including security interests, undertakings, (non-)financial covenants and other restrictions – can nonetheless be effective in monitoring, … Read more

How to Effectively Regulate Related-Party Transactions

Related party transactions (RPTs) are a common corporate governance concern that cuts across many jurisdictions but remains hard to regulate. Allowing value-increasing RPTs while preventing the value-decreasing ones in a cost-effective way is a challenging task for regulators. Jurisdictions do it in different ways but, in general, use either procedural safeguards or substantive standards enforced by the courts (or a combination of both). In two recent papers, I pursue the question of how to design an effective and efficient RPT regulation, based on a discussion of two prevalent oversight tools.

In one paper, I examine the court review of RPTs … Read more

The Lowdown on Related Party Transactions by Directors or Managers in Public Companies

Though no longer surprising, corporate scandals can still involve the unexpected. Take the recent Carlos Ghosn and Nissan saga, for example. Aside from its sensational aspects, what is striking about the scandal was Ghosn’s alleged value-diverting related party transactions (“RPTs”) (see here and here). Though not unusual on their own, RPTs can be noteworthy when they occur between a director or manager (who is not a significant or controlling shareholder) and a company with a controlling shareholder. Ghosn was the chairperson of the board of directors of Nissan, which was controlled by another automobile company, Renault SA, (see hereRead more