On the instruments of governance : a law & economics study of capital instruments in limited liability companies

Abstract: The foundation of this thesis is the connection between corporate finance and corporate governance. Corporate finance has predominantly been analysed by financial economics models and thereby not recognised significant intrinsic features of the capital instrument design. In this paper, the principles of corporate governance are utilised to remedy these shortcomings, elaborating the control contents of capital instrument design.The methodology of this thesis is derived from law & economics. Traditionally, the methodology encompass an economic ordering of legal subject matter but according to an integrated version of the methodology, legal and economic analytical models may be used on equal standing. Certain residual discrepancies between legal and economics reasoning are noted in the paper.The capital instrument design is explored in an analysis of rationale and composition. The rationale of capital instruments is derived from the preferred state of the company technique, as it is understood in company law and agency theory. The composition is analysed in three levels - mechanistic, contractual and structural - based on a conjecture that governance rights counterbalance control risks.The conclusions include that capital instruments are designed to establish flexibility and balance in the company technique. The governance rights are similar in both equity and debt instruments, which enable a condensed description of capital instrument design. The holders are empowered by the capital instruments and may use their governance rights to allocate and reduce their risks, adapting the company into a balanced structure of finance and governance.