TunnelingJohnson, La Porta, de Silanes, Shleifer: Tunneling Johnson, La Porta, de Silanes, Shleifer Presentation for Subject Corporate Governance IES FSV UK Jana Chvalkovská, Jana Říhová, Kateřina Semianová


Content: Content „Tunneling“ Two forms of tunneling Duty of loyalty vs. Duty of care Common law vs. Civil law Relation of legal framework and tunneling Cases of tunneling in Western Europe Conclusion


„Tunneling“: „Tunneling“ Transfer of resources out of a company to its controlling shareholder The term 'tunneling' was first noted in this context in the Czech Republic during the first half of 1990s


2 forms : 2 forms 1. The controlling shareholder can transfer resources from the firm for his own benefit through self-dealing transactions 2. The controlling shareholder can increase his share of the firm without transferring any assets through financial transactions that discriminate against minorities


Loyalty vs. Care: Loyalty vs. Care The duty of care - refers to the responsibilities of corporate directors The duty of loyalty - addresses specifically situations with conflict of interest


Common vs. CivilLaw: Common vs. Civil Law Common law Anglosaxon origin Courts are finding law „Law of Judges“ Sources of law Lege lata Past judicial decisions (precendents) Principles of justice, moral, equity Civil Law Continental – Roman origin Based entirely on „written norms“ Judges decide solely on basis of valid law Sources Lege lata


Legal frameworkvs.Tunneling: Legal framework vs. Tunneling Different evidentiary hearing Interpretation of norms (Care vs. Loyalty) Legal predictability vs. Fairness Legislation process itself


Practical examples from Western Europe: Practical examples from Western Europe SARL Peronnet SCL as subsidiary of majority owner, SAICO as minority shareholder expropriated corporate opportunity – By building and leasing a warehouse to Peronnet. Marcilli Sacrem as controlling shareholder, Two minority shareholders Transfer pricing – resold export goods for inappropriately high price Flambo and Barro Controlling shareholder – Flambo Asset stripping (pledge Barro as collateral to guarantee Flambo’s debt, forced Barro to acquire all of the new shares of Flambo, withdrawals from Barro’s accounts, diverted important contract) Volkswagen bought out for different price from minority shareholder British-Israeli Bank.


COURT JUDGMENTs: COURT JUDGMENTs SARL Peronnet The court ruled against SAICO as SARL Peronnet expanded during this period. The decision had a legitimate business purpose. Marcilli The court declined to appoint a judicial investigator. The court focused on the duty of care Flambo and Barro The court relied on the business judgment rule Flambo’s conduct was consistent with the interest of the group as a whole. Volkswagen The court refused: „controlling shareholder did not owe any duties of good faith or loyalty to the minority shareholders“.


CONTINENTAL EUROPE vs. ANGLO-SAXON world: CONTINENTAL EUROPE vs. ANGLO-SAXON world CONTINENTAL EUROPE Court takes a broad view of the interests of the group rather than the subsidiary company. Intergroups relations are not subject to legislation. ANGLO-SAXON WORLD In the U.S. and the U.K., courts would be very suspicious. Fairness to the minority shareholders.


Conclusion: Conclusion Tunneling is negatively correlated with the enforceability of law Legal tunneling is more passable in civil law environment (weaker protection of minority shareholders)


The most famous Czech „Tunneling guy“: The most famous Czech „Tunneling guy“


Thank you for your attention: Thank you for your attention