Contractual Safeguards Research Articles

Controlling shareholders and sustainable corporate governance: The role of dual-class shares

Abstract Low-carbon innovation is necessary to overcome the delay of governments in implementing the Paris agreement. However, large institutional investors only engage in climate risk management. They cannot commit to low-carbon innovation because that is fundamentally uncertain, short-term unprofitable, and their index-tracking strategy is incompatible with screening firm-specific breakthroughs. To pursue sustainable corporate governance, institutional investors should rather tie their hands with controlling shareholders. Controlling shareholders can contribute their entrepreneurial vision to low-carbon innovation while institutional investors allow them to scale this vision. This article argues that institutional investors catering to the preferences of climate-conscious beneficiaries should finance controlling shareholders through conditional dual-class shares. Dual-class shares allow relaxing the financial conditions for control. To fulfil their mandate from climate-conscious beneficiaries, institutional investors can outcompete short-term profit-seeking investors by offering controlling shareholders a higher wedge between voting rights and economic interest and the possibility to cash in higher idiosyncratic private benefits of control, if successful, conditional on engaging in low-carbon innovation. Having at stake welfare-increasing private benefits of control, as well as all or most of their wealth, controlling shareholders are incentivized to discover low-carbon breakthroughs or to acknowledge failure to do so. Corporate law should facilitate contracting between controlling shareholders and institutional investors to support this incentive. Target-contingent transfer sunsets should allow cashing in control premiums only if the low-carbon innovation succeeds. Divestment sunsets and other contractual safeguards should prevent controlling shareholders from increasing agency cost, without undermining equity capital raising. Dual-class recapitalizations should be allowed with a majority-of-minority vote.

Relationality in transaction cost economics and stakeholder theory: A new conceptual framework

AbstractStakeholder scholars have long explored how stakeholder relationships differ from economic transactions. We contribute to this ongoing inquiry by developing a conceptual framework of relationality in stakeholder theory that encompasses a stakeholder‐theoretic extension of Williamson's contracting schema and a new typology of stakeholder relationships. Premised on understanding relationality as the need for informal human relationships beyond formal governance, our framework locates the key difference between transaction cost economics and stakeholder theory in their treatment of informal relationships. While transaction cost economics perceives informal relationships to be shaped by formal governance structures and enforced by contractual safeguards, stakeholder theory is open to the possibility that some informal relationships between stakeholders may be genuinely moral and thus irreducible to formal governance and contractual safeguards. These stakeholder relationships may lead to unique economic effects described by instrumental stakeholder theory. The difference that we identified between the two literatures shows how stakeholder theory's embrace of relationality surpasses that of transaction cost economics.

СТРАТЕГІЧНІ АЛЬЯНСИ ЯК ІНСТРУМЕНТ СИНЕРГІЇ МІЖНАРОДНОГО БІЗНЕСУ

The article investigates the role of strategic alliances in developing international business. This study aims to analyze the essence, forms, types, advantages, and disadvantages of strategic alliances, as well as to identify key success factors and potential risks associated with their formation. The research methodology includes a comprehensive literature review and a case study analysis of successful strategic alliances between leading international companies in various industries. The study results demonstrate that strategic alliances have become a powerful tool for achieving synergy and enhancing the competitiveness of companies in international markets. The article highlights the importance of careful planning, partner selection, clear goal setting, and continuous monitoring for the effective implementation of strategic alliances. The study also examines current trends in the development of strategic alliances in the context of globalization and digital transformation of business. The practical value of the study lies in providing insights and recommendations for companies considering the formation of strategic alliances to expand their global presence and achieve sustainable growth in the face of increasing competition and technological challenges. The article concludes by emphasizing the growing significance of strategic alliances as a key instrument for synergy and competitiveness in the international business environment and outlines potential directions for future research in this field. The study delves into the various motivations behind the formation of strategic alliances, such as access to new markets, sharing of risks and costs, acquisition of complementary resources and capabilities, and enhancement of innovation potential. The article also discusses the critical role of trust, communication, and cultural compatibility in the success of strategic alliances, highlighting the need for effective governance mechanisms and conflict-resolution strategies. The article also addresses the challenges and limitations of strategic alliances, such as the potential for opportunistic behaviour, loss of autonomy, and difficulties in integration and coordination, and suggests ways to mitigate these risks through proper due diligence, contractual safeguards, and ongoing relationship management.

How distance influences contractual governance in buyer-seller relationships

This paper investigates how psychological and geographical distance influence contractual governance in exchange relationships. Drawing on multiple data sources, we find that both psychological distance and geographical distance increases firms' contractual safeguard enforcement, while psychological distance decreases the firms' contractual coordination enforcement. Moreover, the paper discusses the effect of psychological distance and geographical distance on contractual coordination enforcement. Findings suggest that firms should consider the nuanced influences of geographical and psychological distance on contractual safeguards and coordination clauses in governing exchange relationships.

Managers’ Perceptions and Microfoundations of Contract Design

In interfirm exchanges such as contracts, transaction cost economics theory (TCE) argues asset specificity, critical for value creation, poses hazards requiring contractual safeguards. TCE assumes actors have foresight to mitigate these hazards even though specificity is typically hard to observe, suggesting managers’ impressions may be biased. Taking a microfoundational approach, we explore how individual negotiators form perceptions of optimal asset specificity and aggregate them to a firm-level assessment that may be influenced through negotiation. We then explore how managers may actively manipulate their counterpart’s perceptions to maximize their firm’s value capture. We theorize about when this may occur and the implications for contractual governance, value creation/capture, and repeated exchanges – each of which may vary from extant predictions. By applying both an expanded bounded rationality assumption (including cognitive distortions) and net value capture motivation symmetrically, we augment contract design research allowing it to predict when and how managers’ strategic behavior may impact exchange outcomes. As a result, this analysis provides a more nuanced understanding of when contract design may intentionally deviate from efficient governance predictions.

Alliance Dynamics for Entrepreneurial Firms

Small firms are thought to encounter various difficulties implementing strategic alliances. Due to these problems, they may be less able to reap the benefits of alliance adaptation, and the changes that occur in alliances over time often will not coincide with the small firm's interests. The evidence we present on contractual renegotiations in alliances suggests that small firms are no more or less likely to experience contractual changes in general. However, small firms tend to bear inefficiencies of two kinds in their collaborations. They are less likely to adapt alliances in the presence of governance misalignments. Furthermore, they are prone to make greater transaction-specific investments without commensurate contractual safeguards, which can lead to ex post hold-up in the form of contractual renegotiations.

Rethinking the concept of capitalism: a historian’s perspective

ABSTRACTThis essay seeks to rethink the concept of capitalism by focusing on power relationships. Conventionally, capitalism has been treated as being essentially an economic or socio-economic system, whereas recent scholars have highlighted the political process and other underappreciated aspects. I propose that capitalism be redefined as a type of civilization: in essence, as a power structure, in a very wide sense, which is established by a group of people who organize themselves and allocate available resources. It presupposes polity, citizenship, and political process, which, along with property rights, contractual safeguards, and other institutions supporting the market economy, may be called the political foundation of capitalism. As such, capitalism has a highly distinctive feature in that economic power is almost independent of political authority, religious command, or physical violence. This redefined concept has significant implications for understanding the history of capitalism. Above all, it assists in rethinking the framework of interpretation and observing the changing dynamics of international relationships in the modern world. Furthermore, it advances fresh perspectives on American history, specifically on such issues as the transition to capitalism, the fate of the ruling class, the nature of slavery in the antebellum South, and gender in the history of capitalism.

Shareholder Conflicts in Close Corporations between Theory and Practice: Evidence from Italian Private Limited Liability Companies

Shareholder conflicts are said to be the Achilles heel of close corporations. They materialize in different ways and shapes, mostly in the form of majority oppression, minority abuse or shareholder deadlocks. Different cognitive biases and heuristics, as shown by the behavioural law and economics movement currently so much in vogue, contribute to their emergence (such as over-optimism, strategic behaviour, availability and representativeness heuristics, information asymmetry). In international corporate law practice, depending on the concrete governance goal to be achieved, entrepreneurs employ various contractual safeguards to effectively prevent and resolve the above shareholder conflicts. The most common are restrictions on the transfer of shares (e.g., the right of first refusal, consent clauses), special prerogatives for minority shareholders (e.g., veto rights over management decisions, super-majorities for fundamental corporate actions) and expulsion clauses, while more experienced players also recur to drag-along or tag-along arrangements, as well as to shoot-out procedures. The present article builds upon this framework in order to conduct probably the first thoroughly comparative law in action research on a representative data set of Italian private limited liability companies (srl) incorporated in South Tyrol and Milan. The empirical findings, with some unexpected variations between the two places of incorporation, suggest that with reference to conventional safeguards (the right of first refusal, consent clauses, etc.) a more or less significant degree of contractual sophistication can be observed, while innovative clauses such as tag-along or drag-along provisions are generally lacking. The explanation likely lies in the fact that legal advisers path-dependently imitate standardized corporate charter terms widely acknowledged and tested among the legal community rather than investing considerable efforts in the drafting of optimal customized arrangements. The social and economic costs correlated to sub-optimal and status quo-biased contractual design might not be taken into due consideration. This article also provides useful policy suggestions for the legislator and practitioners for the drafting of the best-fitting corporate charter.

Pay to Play: Examining the Consequences of Making Unilateral Relationship-Specific Investments

A firm making preemptive investments for its partner without securing contractual safeguards – known as unilateral relationship-specific investments - is a phenomenon that is often observed in prac...

Marshallian Forces and Governance Externalities: Location Effects on Contractual Safeguards in Research and Development Alliances

We examine the impact of geographic location of alliance activities on the design of safeguards in contracts governing research and development (R&D) partnerships. Joining research on agglomeration and alliance governance, we argue that the Marshallian agglomerative forces at work in a given location produce governance-related externalities that extend beyond productivity-related externalities considered in previous research. We investigate how location characteristics linked to Marshallian forces, such as local knowledge spillovers, R&D rivalry, dense industry employment, and the strength of professional organizations, have an impact on the specification of formal governance mechanisms. In particular, these Marshallian forces have a bearing on formal governance mechanisms that safeguard the execution of the R&D partnership, such as joint administrative interfaces and termination provisions. We analyze R&D partnerships between biotechnology and pharmaceutical firms and find that misappropriation hazards arising from greater knowledge spillovers and R&D competition in the region where R&D activities are located promote the use of these formal governance mechanisms in R&D partnerships. We also find that factors supporting thick interpersonal networks, such as the intensity of sectoral employment and the strength of professional bodies, reduce the use of formal governance mechanisms in R&D partnerships.

A Mid‐Range Theory of Control and Coordination in Service Triads

The increased frequency of the adoption of service‐based business models by manufacturers, such as solution provision, has given rise to service triads. While there is consensus that actors in service triads are relationally and performatively interdependent, less is understood about how service triads are controlledandcoordinated. In this study, we use an inductive case‐based approach to build an understanding about the roles, approaches, and contextual factors that influence how service triads are controlled and coordinated. We collected and analyzed data from nine companies forming three service triads, each comprising a customer, a manufacturer of an asset, and a service supplier. We synthesized our findings in a theoretical framework, where we show that first, both, controlandcoordination, are present in service triads rather than just control as previously posited. Second, controlling and coordinating service triads is not a single actor's responsibility but rather a collective effort shared by two or three actors. Third, we uncovered four contingent factors that influence the dynamics of how service triads are controlled and coordinated: the customer's risk exposure due to the offering's failure, the substitutability of the offering, the contractual safeguards, and the relationship closeness.

Renegotiation of joint venture contracts: The influence of boards of directors and prior ties as alternative governance mechanisms

Research on alliance governance has pointed out that joint ventures (JVs) are particularly complex forms of collaboration. Partnering firms therefore often face difficulties in anticipating contingencies and collaborative behaviors at the contract negotiation stage. When initial JV contracts are incomplete, renegotiation represents a key strategic opportunity for enhancing contractual safeguards or coordination guidelines over the course of the joint venture. Costs and risks entailed by renegotiating JV arrangements at a later stage are far from trivial, however. Existing research on alliances suggests that practitioners have alternative relational and formal governance solutions at their disposal for handling possible inefficiencies caused by contractual gaps over time. Although insightful, this research does not enable a determination as to whether these alternative relational and formal mechanisms substitute for or facilitate ex post contractual renegotiation. The competing arguments found in the literature provide little guidance to JV practitioners as well. Our results show that the collaborative context within which the JV is embedded (i.e., prior inter-partner ties) obviates the need for enhancing incomplete JV contracts ex post. By contrast, ex post contractual adjustments are fostered and facilitated by the formal and administrative apparatus engaged over the course of the JV (i.e., an involved JV board of directors). Such opposing effects suggest that prior ties can “prevent” the occurrence of inefficiencies caused by contractual gaps, while an involved JV board primarily can act as a mediation and renegotiation platform to “repair” the exchange when inefficiencies occur. Our findings highlight the multidimensional nature of joint venture governance, and in particular the interplay among various formal and informal governance solutions in the execution of joint ventures. By unpacking their complex effects on the decision to renegotiate incomplete JV contracts, our study also holds important value for managers seeking to govern their JVs over time.

Shareholder Conflicts in Close Corporations: Between Theory and Practice. Evidence from Italian Private Limited Liability Companies

Shareholder conflicts are said to be the Achilles heel of close corporations. They materialize in different ways and shapes, mostly in the form of majority oppression, minority abuse or shareholder deadlocks. Different cognitive biases and heuristics, as shown by the behavioral law and economics movement currently so much in vogue, contribute to their emergence (such as overoptimism, strategic behavior, availability and representativeness heuristics, information asymmetry). In the international corporate law practice, depending on the concrete (principal-principal) governance goal to be achieved, entrepreneurs employ various contractual safeguards to effectively prevent and resolve the above shareholder conflicts. The most common are restrictions on the transfer of shares (e.g., right of first refusal, consent clauses), special prerogatives to minority shareholders (e.g., veto rights over management decisions, super-majorities for fundamental corporate actions) and expulsion clauses, while more experienced players also recur to drag-along or tag-along provisions, as well as to shoot-out procedures. The present article builds upon this framework in order to conduct probably the first wholly law-in-action research on a representative dataset of Italian private limited liability companies (srl) incorporated in South Tyrol and Milan. The South Tyrol represents the paradigm model of the Italian SME market, while Milan occupies an “outlier” position as the major international financial and economic marketplace. The first empirical findings suggest that with reference to “conventional” safeguards (right of first refusal, consent clauses, etc.) a significant degree of contractual sophistication can be observed, while more innovative clauses such as tag along or drag along provisions are generally missing. The explanation may lie in the fact that legal advisers path-dependently imitate standardized corporate charter terms widely acknowledged and tested among the legal community rather than investing considerable efforts in the drafting of optimal customized arrangements.

Contractual safeguarding of specific assets in cross-border and domestic buyer–supplier relationships

Safeguarding specific investments and mitigation of potential opportunistic behaviours are among the most prominent functions of formal contracting in buyer–seller relationships. Extending the extant literature, the present study investigates the relationship between specific investments and the extent of formal contracting in cross-border and domestic relationships. Based on a sample of 156 buyer–seller relationships, the analysis shows that there is a positive association between specific investments and the extent of formal contracting. However, the emphasis on formal contracting is stronger in cross-border relationships than in the domestic ones. Interestingly, the association between specific investments and formal contracting becomes even stronger in cross-border relationships.

Roles of Contractual Safeguarding and Social Embeddedness in Promoting Contractor’s Cooperation Behavior in Construction Projects

Roles of Contractual Safeguarding and Social Embeddedness in Promoting Contractor’s Cooperation Behavior in Construction Projects

Reclaiming 'The Right to Be Let Alone': Seeking Transparency & Uniformity in the Unchartered Territory of Student Data Mining

In the wake of the digital age, educational institutions are having an increasingly difficult time protecting students’ constitutional rights and instead are impinging on their “right to be let alone.” Schools are undergoing a transformative metamorphosis as the teaching tools of yesteryear are rapidly being replaced with advanced technologies to better assess an individual student’s learning needs. Data-driven decision-making is now becoming the status quo for school districts to facilitate the achievement of educational objectives, maintaining cost-effective classrooms and engaging both students and parents alike. As a result, incomprehensible amounts of student data needs to be processed analyzed and stored for each and every student, each and every day, over the course of their K-12 education. This singular shift in education instruction could have unforeseen costs because “once data is collected, it can be very difficult to keep anonymous.” Now the personal student information, compiled for a defined educational purpose, creates considerable temptation to use if for other reasons like target advertising or profiling. Without adequate and transparent privacy protections, companies can collect and sell years’ worth of student data to third parties with impunity. Parents, worried about their children’s data and security, are becoming increasingly frustrated that protected information could easily shared with third parties, without appropriate contractual and legal safeguards. In the face of mounting public criticism and activism against student data mining, the Obama Administration recently proposed a Student Digital Privacy Act to better safeguard student privacy from big data. In a speech previewing several cybersecurity measures, President Obama stated that, “data collected on students in the classroom should only be used for education purposes – to teach our children, not to market our children.” Despite its good intentions, the recently proposed student privacy initiative has garnered critics from diametrically opposed viewpoints. Several members of the $8 billion dollar educational software and technology industry are skeptical about the utility legislation, calling it unnecessary, while many privacy advocates counter the initiative does not go far enough to protect student privacy. The problem remains how to better balance the tension between encouraging educational technology opportunities for teachers and school districts without sacrificing the robust protection of student privacy interests and civil liberties. Part One of this paper will discuss the different uses and categories for educational technologies in the digital age and their increasing proliferation into the classroom and market. Part Two will examine the evolution of longitudinal student data tracking and how that ushered the introduction of big data in K-12 public education. Part Three will consider the rising tide of ethical concerns surrounding student data and what factors make children more vulnerable to exploitation by third party data vendors. Part Four will then focus on how the existing federal frameworks and state law leave wide gaps that make their ability to meaningfully protect student privacy rights inadequate in today’s era of big data. Finally, Part Five will examine how to address these ethical concerns head-on with potential solutions parents, school districts state and federal legislatures, and private sector companies can adopt in order to better protect their students from third party data mining.

Junior doctors are set to take strike action, says BMA

Junior doctors are set to take three days of industrial action after negotiations between the association and the government over the terms of the junior doctor contract broke down on Monday 4 January, the BMA has said. The association announced that the action would take place in January and February, after the government failed to meet junior doctors’ concerns over changes to the contract. It said that the government did not recognise the need for robust contractual safeguards …

Corporate governance and transaction cost economics: A study of the equity governance structure

This paper extends the Transaction Cost Economics (TCE) theory of the equity governance structure by introducing a (hitherto absent) full analysis of the key TCE issue of bilateral dependency between the firm and its shareholders. In addition, the paper discusses the implications of the analysis for the topic of corporate governance and firm performance. We find that when bilateral dependency holds contractual hazards are mitigated as predicted by TCE, but that when it does not contractual safeguards are altered to the disadvantage of shareholders and managerial discretion costs increase as reflected by lower firm valuation. Importantly, our study documents for the first time a class of transactions where business relationships persist indefinitely even though transaction costs are not minimized.

Exploring the survival of patent licensing: some evidence from French foreign agreements

This paper aims to determine the factors that impact on the duration of technology licensing contracts. Using a transaction costs framework, we derive some propositions related to the influence of the contractual safeguards and of institutions on the failure rate of such agreements. We conduct an empirical investigation based on a new dataset of 250 contracts from the French National Institute of Intellectual Property. We show that the actual duration of licensing agreements (a) is positively associated to their profitability and to the level of technological competition, (b) is positively associated to the presence of a renegotiation clause, and (c) is independent of other contractual or institutional safeguards.

The interplay of different types of governance in horizontal cooperations

Purpose– Over the last decades, horizontal cooperations between logistics service providers (LSPs) have become a well-established organizational form and their use is expected to grow even further in the future. In spite of this increasing importance of horizontal LSP cooperations, little research has been done to reveal how to govern these relationships successfully. Particularly, the role of contractual governance and its interplay with operational governance mechanisms remain to be investigated. The paper aims to discuss these issues.Design/methodology/approach– This research analyzes the influence of contractual governance on the effectiveness of two types of operational governance (a formal and a relational type). It relates contractual governance and operational governance to two major outcome dimensions of horizontal cooperations between LSPs (cooperation-based firm performance and cooperation-based learning) and uses multivariate statistical methods.Findings– The results reveal that contractual safeguarding is able to partly replace process formalization when aiming for better cooperation-based firm performance and complement process formalization when aiming for cooperation-based learning. At the same time, relational capital is always complemented by contractual safeguarding independently from the desired cooperation outcome.Originality/value– This is the first study analyzing the role of contractual safeguarding in horizontal cooperations between LSPs. It shows its interplay with operational governance mechanisms, and, thereby, not only considers a relational type of operational governance, but also a formal type.