Optimal Defaults for Corporate Law Evolution

47 Pages Posted: 29 Jan 2002

See all articles by Lucian A. Bebchuk

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Assaf Hamdani

Tel Aviv University Buchman Faculty of Law; ECGI

Multiple version iconThere are 3 versions of this paper

Date Written: January 2002

Abstract

Public corporations live in a dynamic and ever-changing business environment. This Paper examines how courts and legislators should choose default arrangements in the corporate area to address new circumstances. We show that the interests of the shareholders of existing companies would not be served by adopting those default arrangements that public officials view as most likely to be value enhancing. Because any charter amendment requires the board's initiative, opting out of an inefficient default arrangement is much more likely to occur when management disfavors the arrangement than management supports it. We develop a "reversible defaults" approach that takes into account this asymmetry. When public officials must choose between two or more default arrangements and face significant uncertainty as to which one would best serve shareholders, they should err in favour of the arrangement that is less favorable to managers. Such an approach, we show, would make it most likely that companies would be ultimately governed by the arrangement that would maximize shareholder value. Evaluating some of the main choices that state corporate law has made in the past two decades in light of our proposed approach, we endorse some but question others. The arrangements we examine include those developed with respect to director liability, state anti-takeover statutes, and the range of permitted defensive tactics.

Keywords: Shareholders, managers, directors, default rules, interpretation, takeovers, anti-takeover statutes, poison pill, staggered boards

JEL Classification: G30, G34, K22

Suggested Citation

Bebchuk, Lucian A. and Hamdani, Assaf, Optimal Defaults for Corporate Law Evolution (January 2002). CEPR Discussion Paper No. 3140. Available at SSRN: https://ssrn.com/abstract=298755

Lucian A. Bebchuk (Contact Author)

Harvard Law School ( email )

Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)

HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Assaf Hamdani

Tel Aviv University Buchman Faculty of Law; ECGI ( email )

Ramat Aviv
Tel Aviv 69978, IL
Israel

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