The Case Against a Special Regime for Intragroup Transactions

Abstract

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 granted (or, according to some proposals, may reasonably be expected to be granted) to the subsidiary.