1. The Fourth Asian Roundtable on Corporate Governance Shareholder Rights and the Equitable Treatment of Shareholders Eric L. Talley; JD, PhD Professor of Law and Director of Centre in Law, Economics and Organisation University of Southern California Law School Los Angeles, CA 90089-0071; United States Email: etalley@law.usc.eduetalley@law.usc.edu Complexity in Corporate Governance: The Case of Corporate Opportunities Mumbai, India 11 November 2002 The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries, the ADB or the World Bank

2. Principal aim/targets of the COD “Corporate Opportunity Doctrine” Objective: –To deter appropriations of new business prospects “belonging to” the corporation Targets: –Officers & Directors of corporation –Dominant Shareholders who take active role in managing firm

3. Simple Roadmap of a COD Dispute

4. Contracting out of the Doctrine Historically –Could expand but not contract COD’s reach, and only through charter provisions Modern Trend –Allow either expansion or contraction of doctrine in charter and by other actions. But still cannot contract out of remedy –E.g., Del. Gen. Corp. Law § 122(17)

5. Pre-conditions necessary for a nuanced COD to work well Expert Judiciary –Identifying proper LOB, Int/Exp; Adequacy of Disclosure; Administering Remedy Diffuse Ownership –Critical for truly disinterested rejection Thick Capital Markets –Permits under-inclusive doctrine, b/c of market monitoring Nuanced Executive Compensation Schemes –Reduces incentive to take private benefits using COs Relatively Little Uncertainty –Allows for reliable “contracting out”of doctrine

6. Characteristics of an optimal COD when above conditions fail Brudney/Clark (1981); Talley (1998). 1.Liability: Categorical Prohibition on the taking corporate opportunities – especially Inside Directors and Dominant SHs 2.Rejection: Highly Limited: Either none or approval by majority of disinterested shareholders in Corp. 3.Remedy: Abandon difficult to administer gains-based remedy in favor of untailored, “liquidated damages” like remedy

7. Biggest Challenges in Implementing this type of COD Inducing Reliable Shareholder Votes –Implicit patronage to swing shareholders The Difficult Case of Cross Ownership –E.g., X owns 51% of Corp A and 30% of Corp B, and must decide which way to steer project Characteristics of “Liquidated” Remedy –Must be set on a priori grounds, in way that is reasonably related to value of company.