Taking Corwin Seriously

Abstract

Corporate law’s most important development is founded on a misunderstanding of the channels and consequences of shareholder empowerment. The Article’s title references the seminal Delaware Supreme Court decision that ruled that a positive shareholder vote effectively insulates a friendly sale from judicial oversight. Central to Corwin’s reasoning is the notion that the shareholder vote provides an effective restraint against insider overreaching. Yet every deal that includes a premium over the market price is assured of shareholder approval. The doctrinal lynchpin’s real-life insignificance exposes a baffling inconsistency in contemporary takeover jurisprudence.
This Articles makes two novel contributions to the bourgeoning scholarship that Corwin elicits. Descriptively, it uncovers the methods through which shareholders safeguard their interests without resort to litigation. Shareholders’ new-found voting clout does not manifest as an ability to vote down a concrete transaction they are asked to approve. Rather, it originates from the combined efforts of financial intermediaries and activist hedge funds. A hedge fund’s modest ownership position does not pose a direct threat to insiders’ continued incumbency. In combination with the voting power wielded by financial intermediaries, however, a hedge fund’s demand is made loud and clear. The threat of displacement scares the corporate hierarchy into righting the ship. Normatively, it provides a framework for the continued evolution of the Corwin doctrine. Specifically, it proposes that the judicial inquiry into the effectiveness of the final vote focus on whether or not the company being sold was previously the target of hedge fund activism. While shareholder support is assured regardless, an activist presence prior to the sale is indicative of improved operating performance and increased shareholder value. The proposal strikes a proper balance between multiple competing considerations while remaining true to Corwin’s ideological roots.

Keywords: corporate law, corporate governance, takeovers, mergers and acquisitions, Delaware, Revlon, Corwin, shareholder approval, shareholder voting, shareholder activism, hedge fund activism

JEL Classification: K22