What Do Stockholders Own? The Rise of the Trading Price Paradigm in Corporate Law
Forthcoming 47 J. CORP. L. _ (2021)
42 Pages Posted: 20 Sep 2021
Date Written: September 15, 2021
Corporate law is on the cusp of a paradigm shift—a revolution in the definition of the stockholder’s entitlement. For a century, a simple proposition sat at the heart of corporate law: a share of stock may have some trading price, but in an intracorporate dispute that trading price has no necessary bearing on the value of an individual stockholder’s entitlements. Instead, the stockholder’s entitlement is determined by inquiring into the value of the corporate enterprise as a whole, not the individual fractionalized share. First articulated in the context of appraisal rights, this proposition has served as the Atlas of Delaware’s corporate law, providing the theoretical underpinnings of its entire doctrinal universe. It’s the centerpiece of the fairness standard, and it serves as a measure of damages for stockholders who suffer from unfaithful conduct by corporate managers. This traditional paradigm is foundational in the merger context, animating landmark decisions like Unocal and Revlon, for the powers and obligations of boards of directors make little sense if trading prices are the measure of the stockholders’ entitlement.
A new paradigm is emerging, however. In a series of important decisions, the Delaware Supreme Court has thoroughly refashioned the appraisal remedy, elevating the role of trading prices in delineating the stockholder’s entitlement. These decisions have unfortunate consequences even in their native appraisal rights context. But they portend a far broader change that has thus far escaped the attention of commentators, one that goes to the very foundation of Delaware’s corporate law.
As we show in this Article, the Delaware Supreme Court has redefined the nature of the stockholders’ entitlement, and the implications are potentially revolutionary. Most notably, the new paradigm calls into question the power of corporate directors to fight off a hostile bid. In concrete terms, it directly undermines the high-profile line of cases that culminates in the controversial 2011 Airgas v. Air Products decision. In Airgas, which has stood for a decade as the high-water mark of board power under Delaware law, the court allowed directors to repel a bidder offering a large premium to the market price by crediting the board’s view that the corporation’s value—and the value to which the stockholders were entitled—exceeded both the unaffected trading price and the bidder’s offer. If, as the Delaware Supreme Court suggests in its recent appraisal cases, the legal position of stockholders entitles them to nothing more than the trading price of their shares, then the justification for the board’s sweeping powers in Airgas to defend the corporation against hostile suitors has been swept away.
Keywords: corporate law, Delaware, legal change, trading prices, appraisal rights, M&A, poison pill
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