Abstract
In internal transactions between affiliated companies, there are two opposite directions of wealth-transfer: (1) in the “forward transfer of wealth” (FTW), the wealth-transfer arises from an affiliated company where a controller’s “economic interest” (i.e., “cash-flow right”) is smaller relative to another affiliated company where the controller’s economic interest is larger; (2) in the “reverse transfer of wealth” (RTW), the wealth-transfer arises from an affiliated company where a controller’s economic interest is larger relative to another affiliated company, where the controller’s economic interest is smaller. This Article puts forward a new finding that the extent of internal-transaction tunneling is affected not only by a controller’s economic interests in the two affiliated companies but also by valuation multiples—such as price earnings ratios (PERs), price-sales ratios (PSRs), and enterprise value / earnings before interest, tax, depreciation, and amortization (EV/EBITDA)—of the two affiliated companies. Accordingly, this Article suggests a new theory that regulatory authorities and courts should pay attention to how changes of market capitalization of the two companies affect the value of shares that the controller holds. More specifically, based on market capitalization-based analysis and PER-adjusted economic interest gap analysis, this Article counterintuitively shows that a controller can sometimes gain private benefits in the RTW internal transaction. Conversely, this Article, contrary to expectations, demonstrates that a controller can sometimes end up with net private costs in the FTW internal transaction. Based on these counterintuitive arguments, this Article provides a new regulatory framework that avoids under- and over-regulation.
Recommended Citation
Sang Y. Kang,
Unveiling Misconceptions of Tunneling: Market Capitalization-Based Analysis,
13
Mich. Bus. & Entrepreneurial L. Rev.
99
(2024).
Available at:
https://repository.law.umich.edu/mbelr/vol13/iss2/2