Journal of Law, Finance, and Accounting > Vol 6 > Issue 1

A Contracting Model of Entire Fairness: An Analysis of Divestitures of Parent-Held Control Blocks

Stefano Lovo, HEC Paris, France, lovo@hec.fr , Myron B. Slovin, HEC Paris, France, slovin@hec.fr , Marie E. Sushka, HEC Paris, France and Arizona State University, USA, marie.sushka@asu.edu
 
Suggested Citation
Stefano Lovo, Myron B. Slovin and Marie E. Sushka (2021), "A Contracting Model of Entire Fairness: An Analysis of Divestitures of Parent-Held Control Blocks", Journal of Law, Finance, and Accounting: Vol. 6: No. 1, pp 89-123. http://dx.doi.org/10.1561/108.00000052

Publication Date: 06 May 2021
© 2021 S. Lovo, M. B. Slovin and M. E. Sushka
 
Subjects
Corporate governance,  Corporate finance,  Corporate strategy
 
Keywords
JEL Code: G34
Conflict transactionentire fairnessbusiness judgment rule
 

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In this article:
1. Introduction 
2. Contribution to the Literature 
3. The Contracting Model 
4. Empirical Implications 
5. Empirical Results 
6. Conclusions 
Appendix 
References 

Abstract

We develop a contracting theory of entire fairness and apply it to divestitures of majority blocks held by controlling parent firms, including affiliate purchases of such blocks, transactions subject to entire fairness due to the potential for self-dealing. A parent can also divest its stake via business judgment rule methods. Theory and evidence indicate that under entire fairness affiliate purchases occur only when both parent and affiliate hold positive private information; premiums paid are equal to those paid in arm’s length, third party deals. Affiliates gain value at block purchases but lose value in spin-offs and secondary stock issues.

DOI:10.1561/108.00000052