Unregulable Defenses and the Perils of Shareholder Choice

Posted: 29 May 2008

See all articles by Jennifer Arlen

Jennifer Arlen

New York University School of Law

Eric L. Talley

Columbia University - School of Law

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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.

Suggested Citation

Arlen, Jennifer and Talley, Eric L., Unregulable Defenses and the Perils of Shareholder Choice. 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. Available at SSRN: https://ssrn.com/abstract=1138270 or http://dx.doi.org/10.2139/ssrn.398600

Jennifer Arlen

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=20658

Eric L. Talley (Contact Author)

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

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