Shareholder Voting and the Bundling Problem in Corporate Law

Abstract:     
In this paper, I consider the characteristics, limits and promise of shareholder voting as one of many mechanisms that have evolved to constrain deviance by directors from the maximization of shareholder wealth. Finding the existing menu of control mechanisms imperfect, Professor Lucian Bebchuk and other corporate reformers have suggested an increased power in shareholders to intervene in corporate decisions traditionally reserved to the board of directors. The reformers' primary argument is that, under present law, directors can bundle decisions on unrelated actions, for instance a decision on payment of dividends with a decision on management's continued service, thereby limiting the effectiveness of shareholder voting as a control mechanism. I show that this bundling problem is illusory, offer an alternative explanation of the ineffectiveness of shareholder voting and demonstrate that this alternative explanation undercuts the reformers' policy prescription. I conclude that an increased power of shareholder intervention is unlikely to benefit shareholders.

Please see Accepted Paper version at http://ssrn.com/abstract=639381.

Keywords: Corporation, corporate law, corporate governance, shareholder, voting, bundling, board, directors, shareholder wealth maximization, empowering shareholders, SEC

JEL Classifications: D20,D23,D70,D71,G10,G30,G31,G32,G34,G38,K22

Working Paper Series