ABSTRACT
Despite nearly a century of research on business organizations, most Law and Economics scholars continue to interpret corporate law primarily as a response to agency costs arising from a complex network of contractual relationships within the firm. While agency-cost theories offer valuable insights into certain principal-agent relationships – particularly those between shareholders and directors – they often fail to capture other internal dynamics, such as relationships among shareholders themselves. In this article, I contend that corporate law must address not only the mitigation of agency costs but also the distinct costs of collective decision making-namely, the horizontal economic frictions among members of a given corporate constituent, most notably shareholders. In contrast to the bilateral context in which agency-cost theories are most salient, a Law and Economics theory of Shareholder Democracy emerges from the difficulties in aggregating preferences in a multilateral environment, especially when shareholders possess heterogeneous interests. Focusing on the pathologies of shareholder voting, I identify four critical frictions associated with collective decision making-free-riding, rent-seeking, holdout, and indeterminacy-and demonstrate how each differs fundamentally from traditional agency-cost paradigms. Given that these frictions are inherent in modern corporations with multiple shareholders, I explore how they manifest in current corporate law regimes and offer normative insights for reform. By highlighting these underexamined dimensions of shareholder governance, my article calls for a broader theoretical framework to more accurately describe and guide contemporary corporate law.
Khoo, Kenneth, The Law and Economics of Shareholder Democracy (January 8, 2025).
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