Duke Law

Global Capital Markets Center

Professor Deborah A. DeMott

Agency Principles and Large Block Shareholders

Deborah A. DeMott
19 Cardozo Law Review 321 (1997)

ABSTRACT:

Large block shareholders, such as Warren Buffet's Berkshire Hathaway, have the ability to influence the market based solely on their own investment decisions. Does the increased size and importance of the investment suggest that these institutions should be held to more exacting norms than other investors? This article examines the position of large block shareholders in relation to other shareholders and the advantages of their size, such as asymmetric information and favorable pricing for securities purchases and sales, as well as the foregone costs of such large, undiversified investment. A balancing then develops to determine whether or not the advantages warrant increased fiduciary responsibilities in relation to smaller shareholders. Professor DeMott bases the analysis of the relationship between the shareholders on the theory of agency, pointing out that the corporation is not actually the agent of a controlling shareholder if that control is never exercised, examining the severe limitations of agency requirements and pointing out the discrepancies between the traditional agency relationship and relations amongst shareholders in light of the conventional pursuit of self-interest by investors. In addition, she demonstrates how the activities of a larger shareholder provides benefits to the smaller investors, such as monitoring of the corporation, encouraging correction and intervening in corporate affairs before internal problems threaten the existence of the company. She concludes the article by pointing out that although imposing a relational investor doctrine related to agency might create benefits for shareholders over the status quo, it may also pose costs that outweigh such benefits and therefore the requirements may provide no net benefit over the status quo.

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