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Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law

Stephen M. Bainbridge

University of California, Los Angeles (UCLA) - School of Law

October 30, 2002

UCLA School of Law, Law & Econ Research Paper 02-02

Corporations frequently make use of precommitment strategies. Examples include such widely used devices as negative pledge covenants and change of control clauses in bond indentures, fair price shark repellents, no shop and other exclusivity provisions in merger agreements, mandatory indemnification bylaws, and so on. This paper argues that poison pills also can be understood as a form of precommitment, by which the board of directors commits to a policy intended either to negotiate a high acquisition price or to maintain the corporation's independence.

In Quickturn Design Sys., Inc. v. Mentor Graphics Corp., the Delaware supreme court invalidated a no hand poison pill on grounds that a board of directors lacks authority to adopt such devices. In doing so, the court misinterpreted relevant Delaware law. It unjustifiably called into question the validity of a host of corporate precommitment strategies. Finally, and perhaps most troublingly, it called into question the central tenet of Delaware corporate law; namely, the plenary authority of the board of directors.

This article argues that the Delaware supreme court's decision was wrong both as a doctrinal and a policy matter. There simply is no firebreak between the sorts of board self-disablement deemed invalid by Quickturn and the host of other precommitment strategies routinely used by corporate boards of directors. The Delaware supreme court's conclusion that the former are invalid for lack of statutory authority thus threatens to invalidate all of the latter. The article concludes by arguing that the Delaware supreme court should have analyzed the no hand pill under standard fiduciary duty principles rather than creating a new prophylactic ban on precommitment strategies.

Number of Pages in PDF File: 47

Keywords: poison pill, precommitment, board of directors, corporate law

JEL Classification: G34, K22

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Date posted: November 17, 2002  

Suggested Citation

Bainbridge, Stephen M., Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law (October 30, 2002). UCLA School of Law, Law & Econ Research Paper 02-02. Available at SSRN: https://ssrn.com/abstract=347089 or http://dx.doi.org/10.2139/ssrn.347089

Contact Information

Stephen Mark Bainbridge (Contact Author)
University of California, Los Angeles (UCLA) - School of Law ( email )
385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-206-1599 (Phone)
310-825-6023 (Fax)
HOME PAGE: http://www.professorbainbridge.com
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