The law can deter wrongdoing by using sanctions such as fines and prison terms against abusive self-dealing by the controlling shareholder and those who approved the transaction. Fines and criminal sanctions can be imposed upon the interested director and the approving body ranging from criminal intent to obtaining unlawful profits to breaching duties of care and corporate loyalty. The law can also impose severe criminal sanctions when the transaction has been approved in violation of the law. This is clearly recognised in the United States, where the most effective means of enforcement against self-dealing is a civil shareholder suit against controlling shareholders. A court can then enforce a legal suit by summoning witnesses, requesting evidence from more sources and imposing civil and criminal penalties (Nenova and Hickey, 2006).
Untreue (disloyalty) is punishable in Germany by the criminal code, which takes place when an individual authorised to dispose over the property of another person or binding that person abuses their power to do so, or when an individual subject to a duty to attend another person’s financial interests transgresses that duty, and when this concludes in the disadvantage to the other person. Typically, the maximum retribution is five years and may increase to ten in harsh cases. Members of both the supervisory and management boards maybe held accountable to the provision (Conac et al, 2007).
Directors and general managers in Italy are criminally liable for infedeltà patrimoniale (disloyalty) as it is stated in Article 2634, in Italian C.C. if,
having a conflict of interest with corporation, and with the purpose of making an unfair profit or of letting someone else make an unfair profit, they enter into, or take part in decisions relating to, transactions on corporate assets, thereby intentionally harming the corporation.
Prison terms range from a minimum of six months to a maximum of three years. Criminal trials, however, take quite some time as the duration for the statute of limitations for the crime are of a short period, with due qualifications, as well as running simultaneously with the trial; in addition, judges are permitted via a criminal law provision to suspend the exercise of prison convictions for a period of up to two years as in the case of first-time offenders, which is widely applied (Conac et al, 2007).
Most of the above presented legal system strategies against self-dealing transactions represent the core variables used to construct anti self-dealing index of Djankov et al., (2008). Following the same path, the World Bank and this thesis too measure the level of shareholder protection around the world considering the same strategies. Accordingly, after presenting these strategies, Chapter 4 examines the different literatures on how such legal strategies contribute to different corporate finance variables.