Just Say Never? Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett
Cardozo Law Review, Vol. 19, No. 2, 1997
Posted: 20 Sep 1998
A series of important corporate governance questions are likely to be addressed by the Delaware Supreme Court in the near future: whether a board can in fact "just say no" to a hostile bid; whether a board can thwart a proxy fight to redeem a poison pill through a "continuing director" provision in its pill (what might be called "just say never"); and whether shareholders can use their power to amend bylaws to constrain the adoption and maintenance of a pill. It is important that these questions be resolved in a way that maintains a vibrant, if not unconstrained, corporate control market. This is because control markets potentiate the use of capital market signals in the monitoring of managerial performance, which is especially important in an especially competitive domestic and global economic environment. Despite increasing institutional investor activism, the realistic possibility of a hostile acquisition is a necessary ingredient to an optimal corporate governance regime for large public corporations in a stock-market centered capital markets system.
The article argues in doctrinal terms that "just say no" is not the rule in Delaware and that, at a minimum, in the case of a firm with a staggered board the retention of a poison pill beyond the insurgent's initial electoral success is no longer reasonable. Similarly, pills with continuing director provisions (so-called "deadhand pills") violate Delaware statutes that govern the constitution of the board and director authority as well as fiduciary norms that protect the shareholder franchise. Finally, since statutory formalism does not resolve the question of shareholder bylaw amendment authority, the Delaware court should adopt a model of shareholder choice that in, reserving residual governance authority for shareholders, would permit such a bylaw that generally limited the use of poison pills.
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