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Atanasov, Vladimir; Black, Bernard; Ciccotello, Conrad S. --- "Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes" [2012] ELECD 477; in Hill, A. Claire; McDonnell, H. Brett (eds), "Research Handbook on the Economics of Corporate Law" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on the Economics of Corporate Law

Editor(s): Hill, A. Claire; McDonnell, H. Brett

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848449589

Section: Chapter 22

Section Title: Self-Dealing by Corporate Insiders: Legal Constraints and Loopholes

Author(s): Atanasov, Vladimir; Black, Bernard; Ciccotello, Conrad S.

Number of pages: 23

Extract:

22. Self-dealing by corporate insiders: Legal constraints
and loopholes
Vladimir Atanasov, Bernard Black, and Conrad S. Ciccotello



Abstract: Insiders (managers and controlling shareholders) can extract (tunnel) wealth from firms
using a variety of methods. This chapter examines the different ways in which US law limits, or fails
to limit, three types of self-dealing transactions ­ cash flow tunneling, asset tunneling, and equity
tunneling. We examine how US corporate, securities, bankruptcy, and tax law, accounting rules, and
stock exchange rules impact each form of self-dealing, and identify weaknesses in these rules. We
argue that a variety of complex asset and equity transactions, as well as equity-based executive
compensation, can escape legal constraints. We propose changes in corporate, disclosure, and share-
holder approval rules to address the principal gaps that emerge from our analysis.


1. INTRODUCTION1
Managers and controlling shareholders (insiders) can extract (tunnel) wealth from firms using
a variety of self-dealing transactions. Self-dealing occurs across both developed2 and devel-
oping3 markets. It impacts the value of shares and the premiums paid for corporate control.4
This chapter studies how effectively US rules limit self dealing by insiders of public compa-
nies. We consider three broad types of self-dealing transactions: cash flow tunneling, in
which insiders extract some of the firm's current cash flows; asset tunneling, in which insid-
ers buy (sell) assets from (to) the firm at below (above) market prices; and equity tunneling,
in which insiders acquire equity at below market price, either ...