Экзамен зачет учебный год 2023 / Cheffins_43-46

participants have contracted for or otherwise anticipate receiving. One factor which makes the return on a bargain uncertain is the influence of events external to a company. In the video rental scenario, for instance, the bank might well not be repaid if most of the store's customers leave the area as a result of a sudden downturn in economic conditions. Another factor which contributes to uncertainty is the unpredictability of human behaviour. The possibility exists, for instance, that the three video store operators might become bored with the business and ignore it in order to take long holidays or pursue other commercial ventures. Such conduct might well cause the company to fail to repay its debt to the b a n k . 1 4 5

Analysing business transactions in terms of expected monetary values illustrates the manner in which risk should be taken into account when determining a party's return . 1 4 6 The loan the bank made to the video store illustrates how such values are calculated. Assume there is a 96 per cent chance the bank will be repaid in full and a 4 per cent chance the video business will fail within the year, leaving the bank with nothing. The expected monetary value of the loan transaction will be £10,560, which is 96 per cent of £11,000. This leaves the lender with an expected rate of return of £560, or 5.6 per cent of £10,000. The idea of expected monetary values can in turn be used to demonstrate that attitudes toward uncertain prospects differ . 1 4 7 An example again helps to illustrate this point. Company A and company

¬ will not m ak e any cash distributions to the shareholders for the next three

value of this investment is £1,400 (0 + £2,000 multiplied by .70). With company B, there is a 50 per cent chance the shares will be worth £1,200 and a 50 per cent chance that they will be worth £1,600. The expected monetary

ference between the possible outcomes is £2,000 whereas with company ¬ it is only £400. Hence, the variability of return with company A is larger. Economists often characterize variability of return in terms of volatility risk, which refers to the degree of dispersion or variation of possible o u t c o m e s . 1 4 8 Investments which have a greater range of possible outcomes have a higher

nique in a 1991 judgment: Credit Lyonnais Bank Nederland NVy. Pathe Communications Corp., set out at (1992) 17 Del. J. of Corp. L. 1099; discussed on this point by G. V. Varallo and J. A. Finkelstein, 'Fiduciary Obligations of Directors of the Financially Troubled Company', (1992)

48 Bus. Lawyer 239 at 2 4 1 - 2 .

E C O N O M I C S A N D THE S T U D Y O F C O M P A N Y L A W

skill to be used. A concept which is helpful in analysing these various types of conflicts is agency c o s t s . 1 5 2 Fro m an economic perspective, whenever one individual depends upon another an agency relationship arises. The individual taking action is the agent. The affected party is the principal. Principals would prefer that an agent work selflessly on the tasks he undertakes to carry out. Expecting this is unrealistic. Agents do not receive all of the returns from the profit enhancing activities they engage in on behalf of their principals. Consequently, an agent will always be tempted to put his own interests ahead of those of his principal. When he in fact does so he imposes agency costs on the principal. These are composed of the value of the output lost from the agent's self-serving conduct together with the costs the principal incurs in attempting to regulate such behaviour.

The economic theory of agency costs must be distinguished from the legal concept of agency. Under agency law, a person (the principal) engages another person (the agent) to perform a service on the principal's behalf and delegates some decision-making authority to the agent. Agency costs can potentially arise in any arrangement which meets these criteria. A legal agency relationship will not necessarily exist however in situations which might generate agency costs. Under English law corporate managers are not agents for shareholders because management provides its services to the company, not to the shareholders.1 5 3 On the other hand, from an economic perspective, self-serving managerial conduct will impose agency costs on shareholders. This is because shareholders, as principals, depend on management, as agents, to operate the business profitably.

Company participants often rely on bargaining to resolve issues which affect relations between them. For example, a company's members can use the corporate constitution and a shareholders' agreement to structure their relationship among themselves. A l s o , creditors can rely on the terms in debt contracts to try to regulate conduct which might increase the likelihood of default. With workers the express terms in employment contracts will deal with issues such as wages, work hours, and holidays. With corporate managers, the discretion they have to run a company can be circumscribed by contractual documentation. For instance, in a company funded by venture capital, numerous issues affecting the manner in which it is to be run will be dealt with in considerable detail in the company's articles of association and other relevant documents . 1 5 4

While company participants rely on bargaining arrangements to deal with issues they confront, achieving complete specificity is usually not possible. The obstacles which dissuade and prevent transactors from dealing by contract

cussion.

with all outcomes for all possible situations are various. They include factors already considered, such as the absence of perfect information, the presence of transaction costs, and the practical difficulties associated with enforcing contractual arrangements. The extent to which company participants rely on detailed bargaining arrangements will depend on the circumstances involved in each particular instance. In the next chapter we will analyse in greater detail the degree to which those involved with companies use contractual documentation to govern issues which affect them. We will do this as part of a detailed examination of key company participants.