Irreconcilable Differences: Judicial Resolution of Business Deadlock

Claudia Landeo and Kathryn Spier ()
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Kathryn Spier: Harvard Law School, Postal: Hauser Hall Room 302, 1575 Massachusetts Ave, Cambridge MA 02138

No 2013-9, Working Papers from University of Alberta, Department of Economics

Abstract: This article studies the judicial resolution of business deadlock. Asset valuation, a necessary component of business divorce procedures, can pose serious problems in case of closely-held businesses such as general partnerships and limited liability companies (LLCs). Courts face the challenge of designing valuation mechanisms that will trigger the owners to truthfully reveal their private information. We theoretically and experimentally assess the ex post judicial design and properties of judicially-mandated Shotgun and Private Auction mechanisms. In the former mechanism, the court would require one owner to name a buy-sell price, and the other owner would be required to either buy or sell his or her shares at the named price. In the latter mechanism, the court would mandate both owners to simultaneously submit a price to buy the other owner's assets. Our experimental findings support our theory: The Shotgun mechanism with an informed offeror is superior to the Private Auction in terms of an equity criterion. In the Shotgun mechanism, the informed offeror has an incentive to truthfully reveal his private information and, as a result, an equitable outcome is more likely to be achieved. The analysis presented in this article provides an equity rationale for the judicial implementation of the Shotgun mechanism in business divorce cases, and demonstrates the empirical feasibility of our proposal.

Keywords: judicial resolution of business deadlocks; general partnerships; limited liability companies; closely-held business entities; shotgun provisions; buy-sell clauses; cake-cutting mechanisms; auctions; bargaining with common values; asymmetric information; experiments (search for similar items in EconPapers)
JEL-codes: C72 C90 D44 D82 K20 K40 Z18 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013-07-01
New Economics Papers: this item is included in nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2013_009

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