152 U. Pa. L. Rev. 785 (2003-2004)
Controlling Controlling Shareholders

handle is hein.journals/pnlr152 and id is 801 raw text is: DOCTRINES AND MARKETS
CONTROLLING CONTROLLING SHAREHOLDERS
RONALDJ. GILSONt &JEFFREY N. GORDONtt
INTRODUCTION
The rules governing controlling shareholders sit at the intersec-
tion of the two facets of the core agency problem in United States
public corporations law. The first is the familiar principal-agency
problem that arises from the separation of ownership and control.
With only this facet in mind, the presence of a large shareholder may
better police management than the standard panoply of market-
oriented techniques. The second is the agency problem that arises
between controlling and non-controlling shareholders, which pro-
duces the potential for private benefits of control-benefits to the
controlling shareholder not provided to the non-controlling share-
holders. There is, however, a point of tangency between these facets.
Because there are costs associated with holding a concentrated posi-
tion and with exercising the monitoring function, some private bene-
fits of control may be necessary to induce a party to play that role.
Thus, from the public shareholders' point of view, the two facets of
the agency problem present a tradeoff. The presence of a controlling
shareholder reduces the managerial agency problem, but at the cost
of the private benefits agency problem. Non-controlling shareholders
will prefer the presence of a controlling shareholder so long as the
t CharlesJ. Meyers Professor of Law and Business, Stanford Law School, and Marc
and Eva Stern Professor of Law and Business, Columbia Law School. Contact at rgilson@
stanford.edu.
't Alfred W. Bressler Professor of Law, Columbia Law School. Contact atjgordon@
law.columbia.edu.
We are grateful to Frank Balotti, Bernard Black, Steven Fraidin, Michael Klausner,
Ted Mirvis, Victor Lewkow, Charles Nathan, Adam Pritchard, Mark Roe, Kenneth Scott,
Vice Chancellor Leo Strine, and participants at the Symposium on Control Transac-
tions cosponsored by the University of Pennsylvania's Institute of Law and Economics
and the Law Review and at faculty presentations at Stanford and Harvard Law Schools
and to the University of Pennsylvania Law Review for helpful comments on an earlier
draft of this Article. We are also grateful to Scott Ashton for research assistance.

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