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

Abstract: The foundation ofthis thesis is the connection between corporate finance andcorporate governance. Corporate finance has predominantly beenanalysed by financial economics models and thereby not recognisedsignificant intrinsic features of the capital instrument design. Inthis paper, the principles of corporate governance are utilised toremedy these shortcomings, elaborating the control contents ofcapital instrument design. The methodology of this thesis is derived from law & economics.Traditionally, the methodology encompass an economic ordering oflegal subject matter but according to an integrated version of themethodology, legal and economic analytical models may be used onequal standing. Certain residual discrepancies between legal andeconomics reasoning are noted in the paper. The capital instrument design is explored in an analysis ofrationale and composition. The rationale of capital instruments isderived from the preferred state of the company technique, as it isunderstood in company law and agency theory. The composition isanalysed in three levels - mechanistic, contractual and structural- based on a conjecture that governance rights counterbalancecontrol risks. The conclusions include that capital instruments are designed toestablish flexibility and balance in the company technique. Thegovernance 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 usetheir governance rights to allocate and reduce their risks,adapting the company into a balanced structure of finance andgovernance.