Private Benefits of Control

Spring 2011
Woojin KIM
1
?

As of 2010
As of 2010
Source: http://www.mediatoday.co.kr 2007.11.02, originally from Kyobo Securities 4
Agenda

Security Benefits vs. Private Benefits

Types of Private Benefits

Measuring Private Benefits of Control

5
Two classes of benefits (from holding stocks)

Fundamental Question

Why does corporate control have value (premium)?

Recall that in Miller-Modigliani’s world, control premium

does not exist……

It must be the case that control gives some benefits to the

controlling party…

6
Two classes of benefits (from holding stocks)

Security Benefits

ƒ total market value of the income streams (i.e. dividends)

that accrue to the corporations’ shareholders
ƒ received by all shareholders in proportion to ownership
ƒ determines firm value in Miller-Modigliani (MM) world

Private Benefits

ƒ benefits that accrue to the controlling party (current

management/controlling shareholders, acquirer)
ƒ but not to the minority shareholders (Grossman & Hart 1988)
ƒ do not exist in Miller Modigliani (MM) world
7
Two classes of benefits (from holding stocks)

Beneficiaries by Types of Benefits and Tradability

Minority only security benefits (dividend claims)

in the
Shareholders can they sell security benefits? Yes open-
market

Management only private benefits of control

with no shares can they sell private benefits? No

Mgmt=Control- both security AND private benefits

ling Shareholder can they sell security benefits? Yes
block
can they sell private benefits? Yes trade

8
 Types of Private Benefits of Control

Types of Private Benefits Corporate Resources

Relatively
harmless
Amenity Benefits No Diversion/
Synergies No Expropriation

Perquisites (Perks) Diversion/

“Tunneling” Expropriation
Detrimental
to minority
shareholders

9
Types of Private Benefits of Control

Amenity Benefits

ƒ utility to the (founding) manager that does not come at the

expense of profits or corporate resources
ƒ ‘psychic’ value some shareholders attribute simply to
being in control
* ex. a founder may derive utility from having his child
run the company that bears the family name

=> “pass on the family tradition”

10
Types of Private Benefits of Control

Amenity Benefits

ƒ background: (being known for) managing a (certain type

of) firm can be a consumption good
- participate in exciting social, political, cultural events
* invitation to the Blue House/White House

- ‘celebrity’ effect: pro sports clubs/mass media firms

* winning the World Series/believe to influence public opinion
* George Steinbrenner, Paris Hilton, Donald Trump, etc….

hard to justify multimillion dollar control premium…

11
Types of Private Benefits of Control

Synergies

ƒ discussed in acquisitions / control block transaction

framework

ƒ based on empirical finding (1980) that tender-offer price

exceeds post-offer exchange price by more than 10%

- post-offer exchange price: reflects security benefits from

the target after the control transfer to the acquiring firm

Why would acquiring firm pay more than security benefits?

12
Types of Private Benefits of Control

Synergies

ƒ Value of the target shares to the acquiring company that

- stem from the control of the target resources (private benefits)

* ex. vertical integration where target was supplier

- rather than from their proportional claims to the net cash flow
of the target (security benefits)

13
Types of Private Benefits of Control

Perks (Perquisites)

ƒ On-the-job consumption by the management

- explicitly or implicitly paid for by the company’s account

ƒ To the extent that perks might increase productivity,

it may not be that harmful

ƒ Therefore, conceptual amount of loss to

shareholders would be given by:
total perks – any productive effect

However, it would be difficult to estimate in practice

14
Types of Private Benefits of Control

Perks (Perquisites)

ƒ Costly Private Jets

* ex. RJR Nabisco’s fleet of 10 aircrafts with 36 pilots, to which the
CEO Ross Johnson’s friends and a dog had access….

ƒ Plush offices, private boxes at sports events, country club

memberships, celebrities on payroll, hunting and fishing
lodges, extravagant entertainment expenses, expensive
art,…..and many more!!

ƒ Favoritism in personnel management (hiring/firing)

- hire family members/friends
15
Types of Private Benefits of Control

Perks (Perquisites): Evidence

ƒ Firm’s stock price falls by an abnormal 2% when

firms first disclose that their CEO has been
awarded the aircraft pack (Yermack 2004)

ƒ Firms that allow personal aircraft use by the CEO

underperform the market by about 4%

16
Types of Private Benefits of Control

Tunneling: An Extreme Example

ƒ Let’s start with a shocking example…..

ƒ Consider oil industry

ƒ In April 2002, Exxon/Mobil was valued at $12.38 per

barrel of oil it owned.

ƒ How much would Gazprom, a Russian natural gas firm,

be valued at per barrel (of oil equivalent: 5,486 cubic feet
of natural gas per barrel of oil)? 15 cents!!!

source: Dyck, 2002, The Hermitage Fund: Media and Corporate Governance in Russia,
Harvard Business School Case N2-703-010 17
Types of Private Benefits of Control

source: Dyck, 2002, The Hermitage Fund: Media and Corporate Governance in Russia,
Harvard Business School Case N2-703-010 18
Types of Private Benefits of Control

Tunneling: Another Russian Example

ƒ Majority shareholder of a Russian company proposed a “reverse

stock split” as follows
- existing shareholders receive 1 new share for every 136,000 old shares
ƒ Why?
- because the 2 minority shareholders owned less than 136,000 shares and
therefore would not have the right to any shares
- Instead, they were simply paid off with the par value of their shares…

ƒ After this, the majority shareholders of other companies also

proposed similar reverse stock splits….
source: BMA, 2006
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Types of Private Benefits of Control

Definition

ƒ diversion/expropriation/transfer of corporate
resources/profits from the corporation (or its minority
shareholders) to its controlling party
- controlling party generally refers to controlling shareholder
who is typically also a top manager
- fundamentally stealing/self-dealing

ƒ originated from characterizing the expropriation of

minority shareholders in the Czech Republic
- transfer of assets and profits out of firms for the benefit of
those who control them
- as in literally removing assets through underground tunnel
20
Types of Private Benefits of Control

Types of “Tunneling”

ƒ outright theft/fraud

ƒ non market price transactions/transfer pricing

- asset sales
- mergers
- dilutive new share issues

ƒ loan guarantees

ƒ expropriation of corporate opportunities

21
 Types of Private Benefits of Control
An International Study of “anti-self dealing”

ƒ Asked lawyers around the world regarding a hypothetical self-

dealing transaction and its legal consequences

Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing 22
 Types of Private Benefits of Control
An International Study of “anti-self dealing”
The Situation
ƒ Buyer Co. is a publicly traded food manufacturer company.
ƒ Mr. James is Buyer’s controlling shareholder and a member of Buyer’s board of
directors. He owns 60% of Buyer, and elected 2 directors to Buyer’s 5-member
board of directors. Junior is Mr. James’ son and CEO of Buyer.
ƒ Mr. James also owns 90% of Seller, which operates a retail hardware chain.
ƒ Seller recently shut a large number of its stores. As a result, its fleet of trucks is
not being utilized.
ƒ Mr. James proposes to Buyer that Buyer purchase Seller’s unused fleet of
trucks to expand Buyer’s distribution of its food products.
ƒ Buyer agrees. The final terms of the transaction require Buyer to pay to Seller
in cash an amount equal to 10% of Buyer’s assets in exchange for the trucks.
ƒ Buyer enters into the transaction. All required approvals are obtained and all the
required disclosures made.
ƒ The transaction might be unfair to Buyer. Shareholders sue the interested
parties and the approving body.
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing 23
 Types of Private Benefits of Control
An International Study of “anti-self dealing”
Private Enforcement 1: Ex –ante control of Self Dealing: before transaction
ƒ Approval by disinterested Shareholders: 1 if the transaction must be approved
by disinterested shareholders, zero otherwise.
ƒ Disclosures by Buyer: [0 – 1] 1/3 point for each of the following items before
the approval: (1) Mr. James owns 60% of Buyer; (2) Mr. James owns 90% of
Seller; and either (3) all material facts or the following three items: (a)
description of the assets; (b) nature and amount of consideration; and (c)
explanation for the price.
ƒ Disclosures by Mr. James: [0-1] 0 if no disclosure is required, 1/2 if only the
existence of a conflict of interest must be disclosed, without details, 1 if all
material facts must be disclosed.
ƒ Independent review: 1 if a positive review required before the approval (e.g., by
a financial expert or independent auditor), and zero otherwise.
⇒ Ex-ante private control of self dealing: Average of approval by disinterested
shareholders and ex-ante disclosure.
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing 24
 Approval by Ex-Ante Disclosures Ex-Ante Private
Disinterested Disclosure Disclosure Independent control of
Shareholders by Buyer by James review average self-dealing
Hong Kong 1 1.00 1.00 1.00 1.00 1.00
Malaysia 1 1.00 1.00 1.00 1.00 1.00
New Zealand 1 1.00 1.00 1.00 1.00 1.00
Singapore 1 1.00 1.00 1.00 1.00 1.00
South Africa 1 1.00 1.00 1.00 1.00 1.00
Thailand 1 1.00 1.00 1.00 1.00 1.00
United Kingdom 1 1.00 1.00 1.00 1.00 1.00
China 1 1.00 1.00 1.00 1.00 1.00
Australia 1 0.33 1.00 1.00 0.78 0.89
Colombia 1 1.00 1.00 0.00 0.67 0.83
Indonesia 1 0.33 0.50 1.00 0.61 0.81
Russia 1 0.33 0.50 1.00 0.61 0.81
Ireland 1 0.67 1.00 0.00 0.56 0.78
Israel 0 1.00 1.00 1.00 1.00 0.50
Chile 0 1.00 1.00 1.00 1.00 0.50
Taiwan 0 1.00 0.50 1.00 0.83 0.42
Norway 0 1.00 0.50 1.00 0.83 0.42
Belgium 0 0.33 1.00 1.00 0.78 0.39
Canada 0 1.00 1.00 0.00 0.67 0.33
India 0 0.00 1.00 1.00 0.67 0.33
United States 0 1.00 1.00 0.00 0.67 0.33
Argentina 0 1.00 1.00 0.00 0.67 0.33
Turkey 0 1.00 1.00 0.00 0.67 0.33
Peru 0 1.00 0.50 0.00 0.50 0.25
Korea 0 1.00 0.50 0.00 0.50 0.25
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing
 Approval by Ex-Ante Disclosures Ex-Ante Private
Disinterested Disclosure Disclosure Independent control of
Shareholders by Buyer by James review average self-dealing
Poland 0 1.00 0.50 0.00 0.50 0.25
Denmark 0 1.00 0.50 0.00 0.50 0.25
Brazil 0 0.33 1.00 0.00 0.44 0.22
Spain 0 0.33 1.00 0.00 0.44 0.22
Japan 0 0.33 1.00 0.00 0.44 0.22
Mexico 0 0.67 0.50 0.00 0.39 0.19
Pakistan 0 0.00 1.00 0.00 0.33 0.17
Italy 0 0.00 1.00 0.00 0.33 0.17
Luxembourg 0 0.00 1.00 0.00 0.33 0.17
Czech 0 0.00 0.00 1.00 0.33 0.17
Sweden 0 1.00 0.00 0.00 0.33 0.17
Portugal 0 0.33 0.50 0.00 0.28 0.14
Germany 0 0.33 0.50 0.00 0.28 0.14
Finland 0 0.33 0.50 0.00 0.28 0.14
Sri Lanka 0 0.00 0.50 0.00 0.17 0.08
France 0 0.00 0.50 0.00 0.17 0.08
Greece 0 0.00 0.50 0.00 0.17 0.08
Uruguay 0 0.00 0.50 0.00 0.17 0.08
Venezuela 0 0.00 0.50 0.00 0.17 0.08
Switzerland 0 0.00 0.50 0.00 0.17 0.08
Netherlands 0 0.33 0.00 0.00 0.11 0.06
Philippines 0 0.33 0.00 0.00 0.11 0.06
Ecuador 0 0.00 0.00 0.00 0.00 0.00
Austria 0 0.00 0.00 0.00 0.00 0.00
Hungary 0 0.00 0.00 0.00 0.00 0.00
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing
 Types of Private Benefits of Control
An International Study of “anti-self dealing”
Private Enforcement 2: Ex –post control of Self Dealing: after transaction
ƒ Disclosure in periodic filings (e.g., annual reports): [0-1]
- direct/indirect ownership, transaction disclosure (description of asset, amount, pricing)
ƒ Standing to sue: 1 if a 10% shareholder may sue derivatively Mr. James or the
approving bodies or both for damages that the firm suffered, zero otherwise.
ƒ Rescission: [0-1] 0 when rescission is unavailable or only available in case of bad
faith, unreasonable or disproportionate damage, ½ when rescission is available
when the transaction is oppressive or prejudicial, 1 when rescission is available
when the transaction is unfair or entails a conflict of interest.
ƒ Ease of holding Mr. James liable: [0-1] 0 when the interested director is either
not liable or liable in case of bad faith, intent, or gross negligence, 1/2 when the
interested director is liable if he either influenced the approval or was negligent,
1 if the interested director is liable if the transaction is unfair, oppressive, or
prejudicial.
ƒ Ease of holding the approving body liable: [0-1] Similar criterion as above
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing 27
 Types of Private Benefits of Control
An International Study of “anti-self dealing”
Private Enforcement 2: Ex –post control of Self Dealing: after transaction
ƒ Access to evidence Index of access to evidence: Ranges from 0 to 1. One
quarter point for each of the following four rights: (1) a shareholder owning at
least 10% of the shares can request that the Court appoint an inspector to
investigate Buyer’s affairs; (2) the plaintiff can request any documents relevant
to the case from the defendant (without specifying which ones); (3) the plaintiff
may examine the defendant without the Court approving the questions in
advance; and (4) the plaintiff may examine non-parties without the court
approving the questions in advance. One-eight point for each of the following
two rights: (1) the plaintiff may examine the defendant but questions require
prior court approval; and (2) the plaintiff may examine directly the non-parties
but questions require prior court approval.
ƒ Ease in proving wrongdoing Average of the preceding five variables.
⇒ Ex-post private control of self dealing: Average of disclosure in periodic filings
and ease of proving wrongdoing.
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing 28
 Diclosure Ease in proving wrongdoing Ex-Post PvtAnti-Self
in Periodic Standing Resc- Mr.Jame approving Access to control of Dealing
Filings to Sue ission s Liable body liable Evidence avg self- Index
Singapore 1.00 1 1.0 1.0 1.0 1.00 1.00 1.00 1.00
HK 1.00 1 0.5 1.0 1.0 0.75 0.85 0.93 0.96
Malaysia 1.00 1 0.5 1.0 1.0 0.50 0.80 0.90 0.95
New Z 0.80 1 1.0 1.0 1.0 1.00 1.00 0.90 0.95
UK 1.00 1 0.5 1.0 0.5 1.00 0.80 0.90 0.95
South A. 0.40 1 0.5 1.0 1.0 0.75 0.85 0.63 0.81
Thailand 1.00 1 0.0 0.0 0.0 0.25 0.25 0.63 0.81
Ireland 0.80 1 0.5 1.0 0.5 1.00 0.80 0.80 0.79
Australia 0.80 1 0.0 0.0 0.5 0.75 0.45 0.63 0.76
China 0.80 1 0.0 0.0 0.0 0.25 0.25 0.53 0.76
Israel 1.00 1 1.0 1.0 0.5 1.00 0.90 0.95 0.73
US 1.00 1 1.0 1.0 1.0 0.75 0.95 0.98 0.65
Indonesia 0.60 1 0.0 0.5 0.0 0.50 0.40 0.50 0.65
Canada 1.00 1 1.0 0.5 1.0 1.00 0.90 0.95 0.64
Chile 1.00 1 0.0 0.5 0.5 0.50 0.50 0.75 0.63
India 0.80 1 0.5 1.0 1.0 0.75 0.85 0.83 0.58
Colombia 0.20 1 0.0 0.0 0.5 0.63 0.43 0.31 0.57
Taiwan 1.00 1 0.0 0.5 0.5 0.13 0.43 0.71 0.56
Belgium 0.80 1 0.5 0.5 0.5 0.50 0.60 0.70 0.54
Japan 0.80 1 0.0 1.0 1.0 0.75 0.75 0.78 0.50
Korea 1.00 1 0.0 0.0 0.5 0.38 0.38 0.69 0.47
Denmark 0.80 1 0.0 0.5 0.5 0.75 0.55 0.68 0.46
Finland 1.00 1 0.0 0.5 0.5 0.75 0.55 0.78 0.46
Peru 0.80 0 1.0 1.0 0.0 0.50 0.50 0.65 0.45
Portugal 1.00 1 0.0 0.5 0.5 0.50 0.50 0.75 0.44
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing
 Diclosure Ease in proving wrongdoing Ex-Post PvtAnti-Self
in Periodic Standing Resc- Mr.Jame approving Access to control of Dealing
Filings to Sue ission s Liable body liable Evidence avg self- Index
Russia 0.00 0 0.0 0.0 0.5 0.25 0.15 0.08 0.44
Turkey 0.60 1 0.0 0.5 0.5 0.25 0.45 0.53 0.43
Italy 1.00 1 0.0 0.0 0.5 0.25 0.35 0.68 0.42
Norway 0.20 1 0.0 1.0 0.5 0.75 0.65 0.43 0.42
Pakistan 0.80 0 1.0 0.5 0.5 0.50 0.50 0.65 0.41
Sri Lanka 0.80 1 0.5 0.5 0.5 0.50 0.60 0.70 0.39
France 0.80 1 1.0 0.0 0.5 0.25 0.55 0.68 0.38
Spain 0.60 1 0.0 0.5 0.5 0.25 0.45 0.53 0.37
Argentina 0.40 1 0.0 0.0 0.0 0.50 0.30 0.35 0.34
Czech 0.40 1 0.0 0.5 0.5 1.00 0.60 0.50 0.33
Sweden 0.40 1 0.0 0.5 0.5 1.00 0.60 0.50 0.33
Poland 0.20 1 0.0 0.0 0.5 0.75 0.45 0.33 0.29
Luxembou 0.60 0 0.0 0.5 0.5 0.00 0.20 0.40 0.28
Germany 0.40 1 0.0 0.5 0.5 0.25 0.45 0.43 0.28
Brazil 0.20 1 0.0 0.5 0.5 0.25 0.45 0.33 0.27
Switzerland 0.40 1 0.0 0.5 0.5 0.50 0.50 0.45 0.27
Greece 0.40 0 0.0 0.5 0.5 0.50 0.30 0.35 0.22
Philippines 0.40 1 0.0 0.0 0.0 0.75 0.35 0.38 0.22
Austria 0.40 1 0.0 0.5 0.5 0.25 0.45 0.43 0.21
Netherland 0.60 0 0.0 0.0 0.0 0.50 0.10 0.35 0.20
Uruguay 0.00 1 0.0 0.5 0.5 0.75 0.55 0.28 0.18
Hungary 0.20 1 0.0 0.5 0.5 0.63 0.53 0.36 0.18
Mexico 0.20 0 0.0 0.0 0.0 0.50 0.10 0.15 0.17
Venezuela 0.00 0 0.0 0.0 0.5 0.50 0.20 0.10 0.09
Ecuador 0.00 0 0.0 0.5 0.5 0.50 0.30 0.15 0.08
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing
 Types of Private Benefits of Control
An International Study of “anti-self dealing”

Public Enforcement
what happens when all approval and disclosure requirements are met, but James
or the approving parties breach their duties to the company?
ƒ Fines for the approving body: 1 if fines may be applied, zero otherwise
ƒ Prison term for approving body: Maximum length of prison term
ƒ Fines for Mr. James: 1 if fines may be applied, zero otherwise
ƒ Prison term for Mr. James: Maximum length of prison term
ƒ Public enforcement index: [0-1] 1/4 point when each of the following sanctions is
available: (1) fines for the approving body; (2) jail sentences for the approving
body; (3) fines for Mr. James; and (4) jail sentence for Mr. James.

ƒ Prison term for Mr. James if he does not disclose: Maximum length of prison
term for Mr. James if Junior completes the transaction without seeking approval
by the Board of Directors or the Shareholders’ Meeting. Moreover, neither Junior
nor Mr. James discloses the conflict of interest.
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing 31
 Disclosure and approval requirements were met Prison term for
Approving Parties Mr. James Public Mr. James if he
Fines Prison Term Fines Prison Term Enforcement does not disclose
Canada 1 5 1 5 1.0 5.0
Israel 1 5 1 5 1.0 5.0
Malaysia 1 5 1 5 1.0 12.0
Singapore 1 1 1 1 1.0 3.0
Chile 1 5 1 5 1.0 5.0
Ecuador 1 8 1 8 1.0 8.0
Luxembourg 1 5 1 5 1.0 5.0
Portugal 1 3 1 3 1.0 4.5
Russia 1 3 1 3 1.0 3.0
Spain 1 3 1 3 1.0 3.0
Austria 1 10 1 10 1.0 10.0
Czech 1 2 1 2 1.0 2.0
Germany 1 5 1 5 1.0 5.0
Poland 1 5 1 5 1.0 5.0
Norway 1 2 1 2 1.0 2.0
Sweden 1 2 1 2 1.0 2.0
Pakistan 1 0 1 14 0.8 14.0
Switzerland 1 5 0 5 0.8 5.0
Denmark 1 8 1 0 0.8 8.0
Australia 1 5 0 0 0.5 5.0
India 1 3 0 0 0.5 3.0
Belgium 1 5 0 0 0.5 5.0
Brazil 1 0 1 0 0.5 0.0
France 1 5 0 0 0.5 5.0
Greece 0 10 0 10 0.5 10.0
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing
 Disclosure and approval requirements were met Prison term for
Approving Parties Mr. James Public Mr. James if he
Fines Prison Term Fines Prison Term Enforcement does not disclose
Mexico 1 12 0 0 0.5 12.0
Uruguay 0 4 0 4 0.5 4.0
Korea 1 10 0 0 0.5 10.0
Peru 0 0 0 4 0.3 4.0
Hong Kong 0 0 0 0 0.0 14.0
Ireland 0 0 0 0 0.0 1.0
New Zealand 0 0 0 0 0.0 5.0
South Africa 0 0 0 0 0.0 2.0
Sri Lanka 0 0 0 0 0.0 0.0
Thailand 0 0 0 0 0.0 10.0
United Kingdom 0 0 0 0 0.0 7.0
United States 0 0 0 0 0.0 25.0
Argentina 0 0 0 0 0.0 6.0
Colombia 0 0 0 0 0.0 0.0
Indonesia 0 0 0 0 0.0 0.0
Italy 0 0 0 0 0.0 3.0
Netherlands 0 0 0 0 0.0 0.0
Philippines 0 0 0 0 0.0 0.5
Turkey 0 0 0 0 0.0 2.0
Venezuela 0 0 0 0 0.0 5.0
China 0 0 0 0 0.0 5.0
Hungary 0 0 0 0 0.0 3.0
Japan 0 0 0 0 0.0 10.0
Taiwan 0 0 0 0 0.0 5.0
Finland 0 0 0 0 0.0 2.0
Source: Djankov, La Porta, Lopez-de-Silanes, Shleifer, 2006, The Law and Economics of Self-Dealing
Measuring Private Benefits of Control

Two Approaches

Voting Approach

• based on existence of dual class stocks

Control Block Approach

• based on control changes in block transactions

34
 Measuring Private Benefits of Control

Voting Approach

ƒ relies on the existence of companies with multiple classes of stock

traded with differential voting rights
– compute market value of a vote

ƒ market value of a vote reflects the expected price a shareholder

will receive in case of a control contest
– related to the magnitude of private benefits
– also reflects the probability of a control contest (i.e. if there is no
probability of control contest, then there would no voting premium even
though private benefit is positive)

ƒ under some assumptions on probability of a control contest (and

percentage of votes need to obtain control), price of a voting right
can be used to back out (or recover) private benefits of control
35
Measuring Private Benefits of Control

Control Block Approach

ƒ focuses on privately negotiated transfers of controlling

blocks in publicly traded companies

ƒ Price that acquirer pays for controlling block reflects;

– the cash flow benefits from his fractional ownership and
– private benefits from his controlling position => control premium

ƒ Market price of a share after the change in control is

announced reflects only the cash flow (security) benefits

ƒ difference between price paid by the acquiring party and

the price prevailing on the market reflects private benefits
36
Size of Block Premium/Private Benefits of Control
(Source: Dyck and Zingales, 2004, Journal of Finance)