Unregulable Defenses and the Perils of Shareholder Choice
New York University School of Law
Eric L. Talley
University of California, Berkeley - Boalt Hall School of Law
University of Pennsylvania Law Review, Vol. 152, p. 577, 2003
NYU, Ctr for Law & Bus Research Paper No. 03-05; NYU Public Law Research Paper No. 60
USC CLEO Research Paper No. C03-7; USC Law, Olin Research Paper No. 03-7
A number of corporate law scholars have recently proposed granting shareholders an enhanced right to oversee the use of takeover defenses. While these "shareholder choice" proposals vary somewhat in their content, they generally agree that shareholder oversight is justified if and only if shareholders hold a bona fide advantage over managers in evaluating and responding to hostile bids. This article challenges that basic premise, arguing that even if shareholders enjoy a comparative advantage over management in reacting to hostile bids, it does not follow that a shareholder choice regime is value enhancing, because it would give managers an incentive to search for ways to thwart prospective oversight, perhaps even through value-destroying managerial choices that render the firm an unattractive takeover target. We demonstrate (a) that a number of such thwarting defenses exist, (b) that managerial threats to use them are credible, and (c) that their utilization would be difficult or impossible for courts to regulate. We also find empirical support for these hypotheses. Consequently, an immutable, one-size-fits-all shareholder choice rule is likely to be an imprudent policy choice for courts.
Accepted Paper Series
Date posted: May 29, 2008
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