Constraints on Private Benefits of Control: Ex Ante Control Mechanisms versus Ex Post Transaction Review

We ask how to regulate pecuniary private benefit consumption. These benefits can compensate controlling shareholders for monitoring managers and investing effort in implementing projects. Controlling shareholders may consume excessive benefits, however. We argue (a) ex post judicial review of controlled transactions dominates ex ante restrictions on the controlled structures: the latter eliminate efficiencies along with abuses of the controlled company form; (b) controlling shareholders should be permitted to contract with investors over private benefit levels. Both work with better courts. Hence, we recommend creating a European-level corporate court, whose jurisdiction parties can invoke by contract.