Valuing the Firm and the Development of Delaware Corporate Law

Abstract

The merger and acquisition boom has created considerable ferment in the development of corporate law. A major acquisition rarely passes without major litigation. The active market for corporate control is, in part, fueled through a burst of creativity in acquisition techniques of investment bankers and lawyers. Litigation challenges to many of these new techniques have come from shareholders and target managers. The challenges place immense pressure on the legal system to respond. Accordingly, Delaware courts recently decided landmark cases in the areas of parent-subsidiary mergers, obligations of directors in arms-length control transactions, and legality of structural and financial defensive tactics such as selective use of self-tenders, agreeing to lock-up options, and issuing poison pill preferred stock. Although the issues involved have been novel, these cases have been decided within the doctrinal structure of traditional corporate law: first determining whether the case should be decided under a duty of care or duty of loyalty standard and then analyzing the metes and bounds of whatever duty is invoked.

This Article explores a consistent theme present in the Delaware cases: that managers are obligated in discharging their duties of care and loyalty to make a non-market based judgment of the intrinsic value of their publicly traded corporations. One variation on this theme is the notion that courts are competent to second guess managers' valuation judgments.