Using behavioral economics in close corporations to help small sharholders.
In recent months I have posted about Richard Thaler and his new book Nudge. In this book Thaler advocates soft paternalism as a way of nudging citizens to act for the collective benefit. Today, I am posting an essay in which Judd Sneirson uses this concept of behavioral economics-soft paternalism to address the inequalities in closely held corporations- where minority stakes are often subjected to pressures from colluding majority shareholders. Click here skip the introduction and read the Full Article (as PDF)
Abstract (From Paper)
This Article draws on the idea, recently popularized by Richard Thaler and Cass Sunstein, that individuals are imperfect and can sometimes use a well-meaning “nudge” to help them reach decisions that are in their best interest. The Article applies these concepts to the persistent problem of minority shareholder oppression in close corporations and makes soft-paternalistic suggestions to encourage less sophisticated incorporators to protect themselves against squeeze and freeze outs. These include modest changes to states’ typically one-page incorporation forms, improvements to do-it-yourself incorporation resources, and additional offerings for online incorporation services. Once implemented, these recommendations will complement existing close corporation law by helping shareholders help themselves guard against oppression and thereby obviate the need to determine after the fact whether the parties bargained for such protections and whether the law affords such a remedy.
Introduction (From Paper)
Corporate law, despite its many successes, does not suit close corporations very well.2 As a result, minority shareholders in close corporations can find themselves at majority shareholders’ mercies, squeezed out of their jobs and companies and cut off from all financial benefits from their investments. The problem is particularly acute for less sophisticated investors who tend to lack the foresight and legal advice to protect themselves through proper planning at the outset of their new business ventures.