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|Other Titles:||The Control of Corporate Insiders’ Self-Dealing|
Fairness Test;Corporate Insider;Corporate Governance;Protection of Outside Investors;Self-Dealing;The Majority of the Minority Rule;Conflict of Interests Transaction;Negotiation Cost;Controlling Shareholders;Adjudication Cost;Strategic Voting;Related-Party Transaction
|Issue Date:||2016-05-20 16:05:44 (UTC+8)|
Corporate insiders may severely expropriate outside investors through self-dealing. The failure of controlling self-dealing undermines the confidence of outside investors in the stock market. Consequently, all outside investors exit the capital market and the stock market collapses. Corporate self-dealing may be controlled either by law or by market forces. Theoretically, a perfectly efficient market may provide a correct price reflecting the real value of securities offered by different corporations with or without the expropriation of outside investors. In reality, however, the market is not sufficiently efficient to accurately price different securities. As a result, legal rules are necessarily provided to control corporate self-dealing. Two rules may be considered for the control of self-dealing. A fairness test requires interested-insiders to demonstrate that the transaction is fair to the corporation. The other possible solution is the majority of the minority rule that excludes interested-insiders to vote. A fairness test may be applied efficiently only if a competent court possessing the necessary level of expertise exists. Whenever outside investors claim a transaction to be unfair to a corporation the judge should explore the facts promptly and make a precise evaluation. In other words, a court equipped with expertise of the sophisticated business world is essential to the success of this solution. Whether the fairness test or a majority of the minority rule is efficient depends on the legal and institutional conditions of a particular jurisdiction. Where the court is competent and trustworthy, the application of the fairness test can remove the risk of strategic voting. Where the court is incompetent and overburdened, the fairness test can result in chaos due to the court’s potential misjudgment of an efficient transaction to be an inefficient one and vice versa. As a result, a majority of the minority rule provides a more efficient protection for outside investors in this situation. In Taiwan, corporate law provides a lenient form of the fairness test whereby interested insiders may choose to apply the fairness test to a transaction when they vote in favor of it or choose to apply the majority of the minority rule when they decline themselves from voting. This eccentric design gives rise to inadequate protection of outside investors. Given that the court suffers from an overburdened caseload and lacks experience in complicated corporate issues the adoption of a majority of the minority rule may be preferable at current stages.
|Relation:||法學評論, 118, 271-330|
|Appears in Collections:||[Chengchi law review ] Journal Articles|
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