Nudge sparks an idea for shareholder protection

Inspired by the book, law professor Judd Sneirson of the University of Oregon proposes some nudges to protect minority shareholders in small group joint partnerships. The problem of minority oppression (where a few owners collude against another) is common in small joint partnerships; and, of course, uncommon in large publicly traded companies where ownership is distributed among millions of shareholders. Protecting minority shareholders when there are only a few of them requires proper planning. After all, relationships can turn sour quickly.

These minority shareholders, who often incorporate without legal advice or savvy, stand to gain considerably from a default rule designed to nudge them in the direction of protecting themselves against oppression. And, consistent with soft-paternalist ideals, such default would impose minimal (if any) harm and costs on those wishing to opt out.

Sneirson proposes three choice architecture options:

1) Secretaries of state include an opt-out provision on their states’ official incorporation forms that would expressly bind the firm’s shareholders to some degree of investor-to-investor obligations. Sneirson has some ideas about the proper wording for this provision.

2) Do-it-yourself resources about forming corporations should explain the problem of minority shareholder oppression and convey why advance planning is so important in a prominent place in the text.

3) Choice architect entrepreneurs could sell services to complete, review, and file corporate formation documents in such a manner so as to guard and protect present shareholders against any future minority oppression.

To read the full paper, check out Sneirson’s web site here.

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