Business Law Assignment: Regulatory Legal Strategies to Overcome Agency Problems
Question
Task: You are required to develop a detailed business law assignment identifying and critically evaluating the various regulatory legal strategies available to attempt to overcome the agency problem commonly experienced in the corporate form between majority and minority shareholders.
Answer
Introduction
The current business law assignment critically examines the agency problem in a corporation is which is commonly known as the problem between principal and agent or conflicts of interest among the parties who are in a business relationship such as shareholders, managers, agents, etc. The present study aims to identify the regulatory legal strategies that can help corporations to overcome agency problems. Along with that, the evaluation of the legal strategies is also included in the context to reflect on its implementation to solving agency problems. . The agency problems that are most commonly experienced between minority and majority shareholders are mainly considered in the context while evaluating the legal strategies. Agency problems need to be properly fixed as they can affect the overall outcomes of the corporation as well as can create a financial crisis within the business. Agency problems mainly occur due to conflict of interest, information asymmetric, and lack of aligned interest. Hence, the implementation of legal strategies properly is important to handle the agency problem between majority and minority shareholders.
Agency problems between minority and majority shareholders
Before discussing the agency problems between minority and majority shareholders, it is important to discuss the minority and a majority shareholding in a corporate. The shareholders having a shareholding usually holds less than 50% share of the company . In the case of a minority shareholding, the rights of the shareholders vary based on the amount of share they are holding. A minority shareholder who is holding 5% share has different rights on the company decisions and less likely to impact the company's decision compared to the minority shareholder who holds 25% of the total share . In the case of majority shareholders, if they hold 75% or more shares, the shareholder has a strong position over the business and has the power to pass special resolutions. If the majority shareholder holds more than 50% shares, then they have the power to pass only ordinary resolutions such as removal or appointment of directors, authorization to the directors for share allotting. The majority shareholders in a corporation have more power and rights on the decision-making, so there are chances of violating the rights of the minority shareholders. The sec-994(1) of Companies Act 2006 safeguards the rights of minority shareholders. . The Act provides statutory protection to safeguard the rights of shareholders and protect them from unfair prejudice.
One of the key agency problems that occur in a corporation is the struggle between majority and minority shareholders. The majority shareholders have more power of control and governance over the corporation. In the agency problems between minority and majority shareholders, the majority or controlling shareholders acts as agents, whereas the minority shareholders act as a principle.
Identification of regulatory legal strategies
Legal strategies play a crucial role in addressing agency problems, and it plays a key role in eliminating agency costs. There are two types of legal strategies that are applied resolved agency problems, and they are regulatory strategies and governance strategies. The implementation of the strategies depends on the types of agency problems that the corporation is facing. The regulatory strategies that can be implemented to solve agency problems are discussed below:
Rules and standards
Rules and standards are the most common regulatory strategy that restricts the agents from making any decision that can harm the interest of the principal or is against the rule. Rules can be developed as other forms of enforcement, which means based on a rule; the standards can be made to which the agents must have to adhere. The legal strategies that are made under rules and standards aim to regulate the issues between agency and principle. Rules and standards are developed and act as regulatory strategies and are implemented to prohibit specific behaviour that can hamper the interest of parties. . Rules strategies are solely reliable in the case of certain jurisdictions to regulate inter-corporate and complex relations such as self-dealing transactions by majority shareholders. The key aims of the rules and standards are to control the behaviour of the agent and to enforce them to make decisions that ensure the interest of others. Standards are also effective as rules as they are also implemented to protect the rights of the parties. Standards are mainly applicable in terms of the internal affairs of the company.
Entry and exit
Another regulatory strategy that is effective to agency problems is entry and exit. The entry and exit terms are based on terms that reflect the association or disassociation of principles with agents. Entry terms include the requirements related to the agent while entering the corporation. The exit terms allow the principles with exit opportunities that allow them to escape from a costly agency relationship. The entry strategies aim to reduce the opportunistic behaviour of the agent. On the other hand, the exit strategies allow the principles to safeguard their interest from the opportunistic behaviour of the agent. Exit strategies include the strategies such as shareholder's rights to sell their stocks while the company is going to involve in a merger and acquisition deal. The exit strategies are also applicable in the cases of information asymmetry and another factor that can bring a negative impact on the rights of the shareholders. Exit strategy also includes transfer rights, which means the right to sell shares. . The entry and exit strategies act as effective regulatory strategies to safeguard the interest of the shareholders and help them to necessarily act when their interests are hampered by another party.
The regulatory strategies also help in safeguarding the interest and control of the minority shareholders in the decision-making of the company. However, the control of minority shareholders depends on the number of shares they are holding in the company, so it changes from one shareholder to the other. The implementation of regulatory legal strategies is important as it ensures a sustainable relationship between principle and the agent and safeguards the interest of the minority shareholders. The regulatory strategies are also helpful to safeguard the interest of the shareholders during the company’s financial crisis.
Implementation of regulatory legal strategies to overcome the agency problem
The regulatory legal strategies such as rules and standards and exit and entry to overcome the agency problem that are experienced commonly in the corporate form between majority and minority shareholders have been discussed accordingly in the above section. In the most common scenario, the benefits of rules and standards in the corporate form are that they safeguard the firm as well as the shareholders of the business. Hence, it is important to implement these strategies to overcome the agency problem in the corporate sector, and thus, the implementation of these strategies has been discussed on the following grounds:
Protection for shareholders in the jurisdiction- As per the research, it has been identified that the England and Wales laws give security to minority shareholders in several and different ways. A number of protections and rights have been identified in the 2006 Companies Act that is the key source of the law and set standards within the corporate framework for firms in the UK. In several states across the UK, the securities are subject to changes in the articles of association within the firms, so the Corporation Act 2006 must always be measured with the firm's statures in question. Companies that are publicly listed are concerned with even stricter criteria. These levels as of mandatory security of shareholders in the Transparency Rules, Listing Rules and Disclosure and the Code of Takeover, to those where conformity is only suggested in the financier practice form, such as with the Principles of Pre-Emption Group Statement. Hence, the shareholders might obtain security from several common law and standards rules that often function where legislative provisions are unvoiced on a specific issue. Though it is not as common to view case law as the main source of shareholders' rights and it must, however, be offered due consideration along with the several legal sources.
Jurisdiction to protect against shareholdings dilution- ( ) states that the shareholders are offered a number of different types of protection to help make sure that the importance of their shareholdings is sustained compared to other shareholders in a certain firm. One of the protections that the directors of the company can take in the form of the criteria under 2006 Companies Act section 549 and 551 wherein the directors are not authorized to allocate shares within the firm without being authorized by the shareholders, however, brings the possibility for shareholdings dilution on a share to the existing shareholder's attention.
Special rights to choose directors to secure their interests- Until and unless rules have been made for the director's appointment in an agreement of shareholders or the association of the firm, the special rights are not meant for the shareholders. Hence, in the UK and Wales, there are no particular rights to choose directors. The articles of association of the firms frequently allow the board the authority to select directors. It has been addressed in the Model Articles of default for private firms partial by shares within the 2008 Regulations of Companies (Model Articles), though firms might prefer to implement different articles. In addition, it has been identified through the studies that there are similar Model Articles that is Article 17 that offers shareholders to choose a director by a basic resolution needing a mere majority wherein the vote must be more than 50 percent in favour. In several events, shareholders have an inbuilt right to select directors under basic regulation in which the articles are unvoiced on the related concern or claim to limit this aptitude.
Setting the entry and exit terms- These regulatory strategies are open to the regulation that are included on adaptable to the terms wherein principals associate with agents' actions after the agent or principal association is formed. The law can identify the entry terms by, for instance, needing agents to show facts concerning the potential performance quality before building with principals. Instead, the law can impose opportunities of existing for principals like rewarding to shareholder right to sell their stock or rewarding a loan call to the creditor right. Thus, the strategy of entry is mainly significant in viewing out prospective agents in the markets of public capital . Peripheral financiers understand little about publicly-listed firms unless they are led to know about it. Hence, it is comprehensively acknowledged that public financiers need a certain form of systematic revelation to acquire a sufficient delivery of facts. Constitutional laws authorizing such disclosure deliver an instance of an entry strategy as inventories cannot be traded until the needed facts are gained, commonly by the firm itself. A comparable but wider entry strategy form is an obligation that the procurers of some securities reach an entrance of fiscal deception or net worth. Moreover, the exit strategy is also persistent in corporate law that enables principals to break out agents that are opportunist. Comprehensively, there are two types of exit rights, and they are: (i) withdraw right and (ii) transfer right .
However, after analysing the overall study, it can be said that the implementation of the above factors can help to overcome the agency problem within a corporate sector. Hence, all the factors above will help to figure out issues that are related to the majority and minority shareholder's rights and avoid the emergence of conflicts concerning the same.
Conclusion
In conclusion, it can be said that the agency problem emerges when there is divergence amongst the organizational management and shareholders rest instead in the interest of the shareholders. Thus, in order to overcome the agency problems, two regulatory legal strategies have been identified, and they are rules and standards along with entry and exit terms. As a result, it can be said that the corporate law plays a significant role in avoiding or eliminating agency problems. Within the regulatory legal strategies, both the identified legal strategies can help to focus and overcome the problems that are associated with corporate law and the issue of shareholdings. On the other hand, it can be said that the shareholders should get an equal right to appoint the director of the firm as well as involve them in decision making.
References
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