Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation
145 Pages Posted: 9 Jul 2011 Last revised: 30 Jul 2011
Date Written: January 1, 1991
Nowhere are the tensions and infirmities in the current framework of corporate governance more apparent than in control transactions. As the legal landscape defining the contours of control transactions increasingly favors management discretion, sophisticated institutional shareholders feel increasingly estranged from corporate governance machinery. Before this corporate governance structure collapses to society's detriment, this Article proposes legislative reform aimed at corporate governance's structural soft spot: control-change transactions. It explores ways to harness the valuable input of sophisticated, expert, and increasingly active institutional shareholders when the conflict between management and shareholders is most acute: during control-change transactions. This Article's proposal seeks to assure that management and shareholders work as a team to determine whether a takeover should occur in the first instance and, in the event of a takeover, to assure that shareholders' voices are heard regarding both the takeover's form and substance and the corporation's future governance structure.
Contests for control of publicly held corporations can take many forms, including proxy contests, tender offers, stock for stock exchanges, open-market purchases, and privately negotiated transactions. Takeovers of public companies constitute a major facet of American business activity, and have become a primary method of corporate expansion and diversification. In recent years, scarcely a week has passed during which at least one major takeover bid has not been announced.
The debate over the effects of corporate takeovers is equally controversial. Logical arguments have been advanced on both sides of the issue. Proponents of increased takeover activity argue that takeovers serve several important social and economic functions, including transferring resources to their most valued uses, replacing ineffective management with more efficient personnel, and allowing shareholders to receive a premium for their shares over the market price. On the other hand, defenders of the defensive activities of target companies assert that hostile takeovers allow companies to be purchased at prices that substantially undervalue corporate assets and divert resources from long-term projects that may not show a profit for several years to short-term projects that only temporarily increase the corporation's stock price. Furthermore, antitakeover weapons are believed to protect such nonshareholders as bondholders and employees.
As yet, however, no scholar has proposed new or model legislation designed to resolve the concerns inherent in the current market for corporate control. This Article attempts to fill this void and proposes legislation providing directors with enhanced guidance and certainty by balancing shareholders' and management's input at those times when management's inherent conflict of interest with shareholders is most acute – during a battle for control of the corporation. In addition, the proposed legislation encourages shareholders to inform management of an optimal course of action for significant decisions affecting the company's potential for acquisition.
Accordingly, Part I traces the evolution of the market for corporate control, identifies the current corporate and legislative impediments to shareholder involvement in this arena and the dearth of current shareholder protection reform proposals for state legislation. Part II analyzes the identity and role of shareholders in the modern corporation. Part III explores the legal and economic justifications for enhancing shareholder input. Part IV delineates a paradigm for reform. Responsive to this new paradigm, Part V proposes a Model Act with Comments. These Comments summarize the justifications for enhancing shareholder input and permit the Model Act to stand alone.
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