Controllers Unbound

Attempting to protect its dominant position in the market for incorporations, Delaware recently relaxed the constraints on public company controllers. This article analyzes how the relaxation of controller constraints is expected to affect public investors and the economy. In particular, we show that this relaxation should be expected to: 

(i) provide controllers with substantial private benefits through six channels that we identify and discuss; 

(ii) impose even larger costs on public investors and thereby generate considerable efficiency costs and reductions in corporate value; 

(iii) transform ownership patterns over time—leading both to an increase in controlled companies incidence and to a decline in the ownership stakes held by controllers;  

(iv) lower significantly the quality of investor protection in U.S. controlled companies relative to such protection in other advanced economies; and

(v) impose especially large costs on public investors and corporate value in companies with dual-class structures and small-minority controllers.

We also demonstrate that market forces and private ordering cannot be relied on to adequately address the above problems. The looming risks we identify for both public investors and economic performance raise serious concerns for anyone interested in investor protection and economic performance.