The Legality of the Shareholder Rights By-Law in Delaware: Preserving the Market for Corporate Control

Posted: 17 Aug 1998


The vitality of the takeover market is approaching a critical juncture. Certain management teams and their lawyers and lobbyists have convinced a passel of state legislatures and state judges to try to kill the market for corporate control.

With the rise of the poison pill and the just-say-no defense, things have not looked so bleak for takeovers since the collapse of Drexel Burnham in the 1980s killed the junk bond market and, with it, the ability to finance major league acquisitions. Delaware courts, for example, have validated the poison pill and seem to be reluctant to restrain its use even in the most egregious circumstances.

Nevertheless, takeovers have made a modest comeback in the early 1990s. And, just as lawyers almost killed the takeover market with the inversion of the poison pill [in the '80s], now they are about to reinvigorate it with another legal invention. The invention is the "shareholder rights by-law," and it promises to be the next major legal battleground in the market for corporate control.

The advantage currently enjoyed by incumbent management in the takeover wars comes from legal toleration of the poison pill. Poison pills can protect shareholders in some cases, but too often target management uses the pill to thwart outside bids even when target firm shareholders want to sell out. Poison pills discourage takeovers by giving target shareholders the right to purchase hundreds of millions of dollars' worth of additional shares at firesale prices when there is a takeover attempt. The pills stay in place until target company directors agree to nullify or "rescind" them.

Poison pills were originally intended to slow down takeovers, thereby allowing the board of directors to fully evaluate a bid, seek other bidder, or negotiate superior term for the shareholders. In other words, the pill was originally intended to act as a means for allowing the board to fulfill its responsibility of maximizing value for the shareholders. It was not "seen as a means for entrenched management teams to thwart takeovers."

JEL Classification: G34, K22

Suggested Citation

Macey, Jonathan R., The Legality of the Shareholder Rights By-Law in Delaware: Preserving the Market for Corporate Control. Journal of Applied Corporate Finance, Vol. 63, No. 2, 1998. Available at SSRN:

Jonathan R. Macey (Contact Author)

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
+203-432-7913 (Phone)
+203-4871 (Fax)

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