Shareholder Divorce Court
Journal of Corporation Law (Forthcoming)
56 Pages Posted: 11 Jun 2018
Date Written: June 7, 2018
Historically, shareholder power within the corporate form has been tightly constrained on the assumption that dispersed shareholders are too inexpert, and insufficiently invested in the business, to contribute positively to governance. In recent years, however, the nature of shareholding has changed. Whereas in the mid-twentieth century, most stock was held by individuals, today, most publicly traded stock is held by large institutions with significant stakes. Corporate law has responded to the increasing sophistication of the shareholder base by expanding shareholder power, but doing so has created a new problem: shareholders have heterogeneous preferences, and when they conflict, the majority may exploit the minority.
The problems are particularly acute when it comes to mergers and acquisitions. Large shareholders may have a variety of investments, and thus be conflicted in their preferences when it comes to merger terms. Their greater influence within the corporate form may influence directors. In this scenario, minority shareholders are left without an effective advocate for their interests, and therefore may be coerced into suboptimal transactions.
This Article proposes that if corporate law is retooled to grant shareholders more power, it should also facilitate “divorce,” namely, provide a mechanism for price discrimination among shareholders with different interests. In particular, states can look to an old solution: the right of appraisal. Appraisal permits a shareholder to petition a court for a judicial evaluation of the fair value of her shares. Before falling into disuse, appraisal was one of the earliest remedies for addressing conflicting shareholder preferences. In recent years, it has enjoyed a renaissance as a mechanism for deterring conflicted or unfavorable transactions. This Article argues that with some modification, appraisal could also be used to satisfy the divergent preferences of a heterogeneous shareholder base.
Keywords: corporations, appraisal, corporate governance, mergers and acquisitions, cross-ownership, common ownership
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