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An Analysis of Shareholder Agreements

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Author Info
Gilles Chemla
Michel A. Habib
Alexander Ljungqvist

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Abstract

Shareholder agreements govern the relations among shareholders in privately held firms, such as joint ventures and venture capital-backed companies. We provide an economic explanation for key clauses in such agreements-namely, put and call options, tag-along and drag-along rights, demand and piggy-back rights, and catch-up clauses. In a dynamic moral hazard setting, we show that these clauses can ensure that the contract parties make efficient ex ante investments in the firm. They do so by constraining renegotiation. In the absence of the clauses, ex ante investment would be distorted by unconstrained renegotiation aimed at (i) precluding value-destroying ex post transfers, (ii) inducing value-increasing ex post investments, or (iii) precluding hold-out on value-increasing sales to a trade buyer or the IPO market. (JEL: G34) (c) 2007 by the European Economic Association.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/JEEA.2007.5.1.93
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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 5 (2007)
Issue (Month): 1 (03)
Pages: 93-121
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Handle: RePEc:tpr:jeurec:v:5:y:2007:i:1:p:93-121

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
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  2. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter. [Downloadable!] (restricted)
  3. Fenn, George W. & Liang, Nellie, 1998. "New resources and new ideas: Private equity for small businesses1," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 1077-1084, August. [Downloadable!] (restricted)
  4. Schmidt, Klaus M., 1999. "Convertible Securities and Venture Capital Finance," CEPR Discussion Papers 2317, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Repullo, Rafael & Suarez, Javier, 1998. "Monitoring, Liquidation, and Security Design," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(1), pages 163-87.
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  6. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  7. Jeffrey W. Allen & Gordon M. Phillips, 2000. "Corporate Equity Ownership, Strategic Alliances, and Product Market Relationships," Journal of Finance, American Finance Association, vol. 55(6), pages 2791-2815, December. [Downloadable!] (restricted)
  8. N. Berger, Allen & F. Udell, Gregory, 1998. "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 613-673, August. [Downloadable!] (restricted)
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  9. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  10. Oxley, Joanne E, 1997. "Appropriability Hazards and Governance in Strategic Alliances: A Transaction Cost Approach," Journal of Law, Economics and Organization, Oxford University Press, vol. 13(2), pages 387-409, October.
  11. Armo Gomes & Walter Novaes, 2001. "Sharing of Control as a Corporate Governance Mechanism," Penn CARESS Working Papers 3756d78204ca49d92aaf1c17c, UCLA Department of Economics. [Downloadable!]
  12. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. HEGE, Ulrich & HAUSWALD, Robert, 2002. "Ownership and control in joint ventures: theory and evidence," Les Cahiers de Recherche 750, Groupe HEC. [Downloadable!]
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  14. John H. Cochrane, 2001. "The Risk and Return of Venture Capital," NBER Working Papers 8066, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Josh Lerner & Alexander Tsai, 2000. "Do Equity Financing Cycles Matter? Evidence from Biotechnology Alliances," NBER Working Papers 7464, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. George W. Fenn & Nellie Liang & Stephen Prowse, 1995. "The economics of the private equity market," Staff Studies 168, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  17. McConnell, John J & Nantell, Timothy J, 1985. " Corporate Combinations and Common Stock Returns: The Case of Joint Ventures," Journal of Finance, American Finance Association, vol. 40(2), pages 519-36, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chemla, Gilles & de Bettignies, Jean-Etienne, 2003. "Corporate Venture Capital: The Upside of Failure and Competition for Talent," CEPR Discussion Papers 4139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Steven N. Kaplan & Frederic Martel & Per Stromberg, 2003. "How Do Legal Differences and Learning Affect Financial Contracts?," NBER Working Papers 10097, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Bienz, Carsten & Walz, Uwe, 2007. "Evolution of Decision and Control Rights in Venture Capital Contracts: An Empirical Analysis," Discussion Papers 2007/13, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
    Other versions:
  4. Roosenboom, P.G.J. & Schramade, W.L.J., 2005. "The Price Of Power: Valuing The Controlling Position Of Owner-Managers In French Ipo Firms," Research Paper ERS-2005-011-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  5. Ferreira, Daniel & Ornelas, Emanuel & Turner, John L., 2007. "Unbundling Ownership and Control," CEPR Discussion Papers 6257, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. McCahery, J.A. & Vermeulen, E.P.M., 2003. "The evolution of closely held business forms in Europe," Discussion Paper 12, Tilburg University, Tilburg Law and Economic Center. [Downloadable!]
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