Delaware's Choice

Abstract

This article first documents the shift to annual elections of all directors at most U.S. corporations, and argues that the alternative of "ineffective" staggered boards would have been more desirable, as a policy matter, but is now a missed opportunity. Using this experience on staggered boards as a motivating case study, the article then examines a policy choice regarding Section 203 of the Delaware corporate code. Four facts are uncontested: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a "meaningful opportunity for success" in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed -- so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success. The constitutionality of Section 203 is therefore "in play," and, with the decline of the poison pill, a constitutional challenge against Section 203 will eventually come. Delaware could avoid this showdown by lowering Section 203's 85% threshold to 70%. Like the middle-ground approach on staggered boards, this amendment -- to a single number -- would also represent good policy: facilitating high-premium offers that attract a supermajority of disinterested shares, but also providing companies with reasonable insulation against opportunistic low-ball offers. This article will be presented as the Pileggi Lecture in Wilmington, Delaware on November 22, 2013.

Keywords: takeovers, Section 203, staggered boards

JEL Classification: G34, K22