Legal Strategies for Agency Cost Reduction in Corporations

دانشنامه حقوق اقتصادی

Article 4, Volume 24, Issue 12, May 2017, Pages 67-112   

Document Type: Scientific research

DOI: 10.22067/le.v24i12.63852

Authors

mojtaba zahedian^{* 1}; reza alipour²; mahsa moshar movahhed³

¹Islamic Azad University in Mashhad

²shahid beheshti university

³Science and Research Branch, Islamic Azad University

Abstract

In the present study, an attempt has been made to gain insight into the status of law in relation to agency costs using an analytical-descriptive method. The issue of agency costs and the urge to present regulations for the agents involved in the commercial ties between companies have been always of research value for lawyers. Such costs, if appropriate measures not taken, can create formidable barriers to the potential interests of stakeholders which eventually puts businesses and investments at jeopardy and may lead to the loss of opportunities to attract dispersed capital of the community. Since the interests of the stakeholders are based on the actions of the agents, it is possible for them to abuse their position, which would be in conflict with the fundamental purpose of the companies. Accordingly, high agency costs can generally place undue burden on the stakeholders of companies, leading to unproductivity of their institutions.
The concept of agency costs was first introduced by economists, and for this matter, the realization of such costs in its very economic essence is beyond the scope of law. A number factors took agency costs into consideration such as asymmetric information phenomenon among corporate activists, opportunist measures, lack of competitive market, and the conflict between stakeholders and agents, to mention but a few.
In normative sense, one of the main functions of any legal system is to create efficiency, or in other words, maximizing wealth in society. Thus, the science of law, by providing various solutions, including ex-ante and ex-post approaches, has used all the capacities defined in the legal system of exploitation and legal rules in order to manage the agency costs.
Categorizing legal solutions into the dichotomy of regulatory and governance solutions is due to the differences existing between business and corporate activists. Considering the significant costs for establishing collaboration among stakeholders, implementing governance strategies by stakeholders in monitoring the agents has not been met with much success.
Therefore, the legislator attempts to lower the agency costs by prescribing regulatory strategies. Because in such situations, regulatory strategies, which have mandatory character, have proven to work more efficiently thanks to their restricting role, and by doing so, the interests of the stakeholders will be respected.
By assigning stakeholders in charge of electing and dismissing the managers as a regulatory tool, in the one hand, it is possible to avoid such costs by choosing the competent agents; and in the other hand, when the agency cost is imposed on the stakeholders due to the measures taken by agents, they can prevent the costs by resorting to the right to dismiss them.
Finally, by acknowledging the right to approve the decisions of the company by the shareholders, another regulatory card will be given to the stakeholders, based upon which a revision of the company constitution will be solely possible on the condition of reaching a consensus by the majority of the stakeholders.
Moreover, setting a minimum legal capital or a prohibition on the distribution of profits among shareholders is because of the fact that the legislator prioritizes the rights of creditors to reduce the agency. In fact, the goal of enforcing warranties against self-dealing transactions and limiting the granting of loans and credits to the agents of the company, is to support shareholders against agents.
Also by defining the requirements regarding the disclosure of information by businesses, the legislator's goal is to prevent the costs. Subsequently, shareholders, even minor shareholders, can be exempted from these costs by using the right to transfer shares or the right to evaluate and resell their shares and leave the company. On the other hand, the rights of the creditors and the parties transacting with the company will be protected with any assumptive change in any case. So if these changes are risky for the creditors of the company, the right to demand their claims before the due time is recognized. Also, in case of merging companies, all the commitments and contracts will be transferred to the newly-merged company, and these companies will be required to fulfill their contractual obligations.

Keywords

Regulatory Strategies; Governance Strategies; Self-Dealing Transaction; Disclosure of Information; Accredited Investor

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