8.3 General Remarks on the Management of Risk 321pyramid structures or cross shareholdings, general voting caps for shareholders);
and structural devices relating to control (such as shareholder agreements).
Restrictions on the assignment of debt claims. In principle, the firm could also
agree with a debt investor that the investor may not freely assign its claims to a
third party. In practice, however, few debt investors would be willing to accept
such restrictions that increase risk.
8.3.4 Counterparty Risks (Agency) in General
The sale of a debt claim or shares can generally be contrary to the firm’s interests
where the buyer is either less likely to comply with its contractual obligations to-
wards the firm or more likely to act in a hostile way or otherwise contrary to the
firm’s interests.
For example, the expected future behaviour of the parties can depend on business culture. A
German bank doing business with German customers is likely to be subject to reputational
constraints in Germany. It has long-term interests in Germany. If the bank assigned its loan
portfolio to, for example, a financial institution based in Dallas, Texas, those reputational
constraints would be lifted because a Texas bank has virtually no fundamental long-term
interests in the German market. In addition, it would be part of the business culture of the
Texas bank to look for shorter-term benefits. The customer could therefore prefer not to
have its debts assigned in the first place.
Assignment of claims. As far as debt claims are concerned, a standard way to miti-
gate this risk is to prohibit both the assignment of the contract as a whole and the
assignment of claims under the contract.
The prohibition of the latter would require an express agreement. The main rule
under contract law is that a party may assign its rights but not its obligations
unless the parties agree otherwise. Sometimes the firm’s contract party may have
been given a right to transfer not only its rights but also its obligations (the con-
tract as a whole, or the rights and obligations attaching to shares).
Sale of shares. There can also be restrictions on the sale of shares (see above).
8.3.5 Information and Reputational Risk
The management of information belongs to the most important elements of the
management of exit. The exit of an investor and the firm’s own actions can signal
something to investors and stakeholders.
Effect of exit constraints on funding. The level of the freedom of exit influence
investors’ perceived risk and thereby also the firm’s access to funding and its cost.
Their effect depends on the preferences of the investor. Lock-up provisions can
signal higher risk to short-term investors whose investments are covered by the
lock-up, but lower risk to long-term investors whose investments are not covered
by the lock-up. The free transferability of shares can signal lower risk to share-
holders, but the existence of effective restrictions on the distribution of funds to