1. Diritto commerciale II
Paola Lucantoni
Professore associato di Diritto dei mercati finanziari
Università degli Studi di Roma “Tor Vergata”

2. AGENCY PROBLEMS OR PRINCIPAL-AGENT PROBLEMS
An agency problem arises whenever one party, termed principal, relies upon actions taken by another party, termed agent, which will affect the principal’s welfare.
The problem lies in motivating the agent to act in the principal’s interest rather then simply in the agent’s own interest.

3. Agency costs in business firms
Firm’s owner and managers
Majority shareholders and minority shareholders
Firm and stakeholders

4. Firm’s owner and managers
Managers – agents
Firm’s owner – principal
Legal problem: assuring that the managers are responsive to the owners’ interests rather than pursuing their own personal interests.

5. Majority shareholders and minority shareholders
Controlling shareholders – agents
Non controlling shareholders – principal
Tension when controlling shareholders can take decisions affecting the class of owners as a whole
Similar agency problems: between ordinary and preference shareholders; between senior and junior creditors in bankruptcy

6. Firm and stakeholders Firm itself – agents
Creditors, employees, customers – principal
So called externalities

7. Legal strategies for reducing agency costs
prescriptive
They dictate substantive terms that govern the content of the principal- agent relationship, tending to constrain the agent’s behavior directly
Regulatory strategies
They seek to facilitate the principal’s control over their agent’s behaviour Their efficacy depends on the ability of the principals to exercise their control rights
Governance strategies

8. 1. Regulatory strategies: Rules and standards to regulate the substance of agency relationship
Rules: prescribe specific behaviours ex ante; commonly used in the corporate context to protect a corporation’s creditors and public investors.
Creditor protection rules such as; dividend restrictions; minimum capitalization requirements; rules requiring action to be taken following serious loss of capital.

9. 1.Regulatory strategies: Rules and standards to regulate the substance of agency relationship
Standards: leave discretion for adjudicators to determine ex post whether violations have occurred
Good faith, fairness

10. 2. Regulatory strategies: Setting the terms of entry and exit
Regulating the terms on which principals affiliate with agents rather than , as with rules and standards, regulating the actions of agents after the principal – agent relationship is established.

11. 2. Regulatory strategies: Setting the terms of entry and exit
Entry strategy: requiring agents to disclose information about likely quality of their performance before contracting with principals.
Important in screening out opportunistic agents in the public capital markets.
IPOs

12. 2. Regulatory strategies: Setting the terms of entry and exit
Exit strategy: allows principals to escape opportunistic agents.
The right to withdrawal
The right to transfer

13. 3. Regulatory strategies: Trusteeship and reward
Trusteeship strategies: seeks to remove conflicts of interests ex ante to ensure that an agent will not obtain personal gain from disserving his principal. It does not define what the agent can do, but rather what he can’t do.
Independent directors
Auditors

14. 2. Regulatory strategies: Setting the terms of entry and exit
Reward strategies: rewards agents for successfully advancing the interests of their principals.
Sharing rule that motivates loyalty by tying the agent’s monetary returns directly to those of the principal. i.e.: equal treatment when tender offers.
Pay-for-performance regime: the agent, although not sharing in his principal’s returns, is nonetheless paid for successfully advancing his interests. i.e.: stock options

15. Other strategies Selection and removal - corporate governance:
Appointment rights: the power to select or remove directors.
Initiation and ratification:
Decisions rights with grants principals the power to initiate or ratify management decisions.
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