Corporate control transactions.

• Author: Rock, Edward B.
• Position: Symposium

INTRODUCTION

Control transactions--a category that includes friendly mergers, hostile tender offers, management buyouts, freeze-outs, and sales of control by a controlling shareholder--stand at the conceptual and practical center of corporate law and governance. These transactions transformed the world during the turbulent 1980s and 1990s, and will do so again during the equally turbulent 2000s.

In February 2003, in the wake of turmoil in boardrooms and markets, the University of Pennsylvania's Institute of Law and Economics and the Law Review, with cosponsorship by the Sloan Foundation and the Saul A. Fox Research Endowment, gathered leading scholars and judges to focus sustained attention on the topic. The twelve articles that are published in this volume are the result.

The articles interestingly fell into four categories: precommitment and managerial incentives; investors' choice; the boundary between markets and doctrines; and views from the bench.

1. PRECOMMITMENT AND MANAGERIAL INCENTIVES

   The first set of articles focus on reasons why reasonable shareholders might intelligently choose some level of insulation from a competitive market for corporate control. These articles collectively represent a fundamental reevaluation of the academic consensus. Since the beginning of the 1980s takeover boom, mainstream academic opinion has ranged across a fairly narrow spectrum. In the first round of the debate, Easterbrook and Fischel represented one position with their argument that target management should remain passive. (1) The principal alternative position was articulated separately by Ronald Gilson and Lucian Bebchuk, who argued that managers should be able to employ limited defensive tactics that would allow them to seek competing bids. (2) The three articles in this section argue, on various grounds, that more robust defensive measures can be justified.

   In Corporate Constitutionalism: Antitakeover Charter Provisions as Precommitment, (3) Marcel Kahan and Edward Rock view the allocation of decision-making authority within a constitutional choice of governance framework. They maintain that the decision to endow directors with substantial power over deciding whether and how to sell the firm may be a completely rational choice for some companies, and when shareholders have chosen such a structure, that decision should be respected. For them, the debate between shareholder choice and management discretion should not focus on universal mandates, but rather should adopt an approach that recognizes that the same regime may not be optimal for all firms. On both theoretical and empirical grounds, it may be perfectly sensible for shareholders to opt for board entrenchment, implemented, for example, by means of a staggered board. This would enable a board to employ selling strategies more effectively and thus to increase the premium that shareholders receive when the company is sold. By binding themselves ex ante with such a precommitment, shareholders may be able to improve their collective position ex post. After examining how shareholders can entrench particular governance structures under Delaware law, they examine two issues that arise once shareholders have chosen to entrench a governance structure: the question of incomplete implementation that arises in cases such as Blasiu (4) and Liquid Audio; (5) and the questions of when and whether changed circumstances justify ex post judicial negation of shareholders' prior commitments.

   In Corporate Policy and the Coherence of Delaware Takeover Law, (6) Richard Kihlstrom and Michael Wachter develop a model that supports a coherent theory of Delaware takeover law. They show that by incorporating corporate policy as a key variable in the model, Delaware law, by allowing for management discretion, can be shown to be best suited for maximizing the value of the corporation and the shareholders' interest under a set of reasonable assumptions. By presenting a corporate policy model that accounts for occasional market mis-pricing and the agency costs associated with managing to the market, they demonstrate that a shareholder choice regime would likely lead to suboptimal investment decisions. In their model, managers are assumed to have better information regarding alternative corporate policies than shareholders but may, in certain circumstances, act to maximize share price in order to insulate themselves from hostile tender offers, even at the expense of maximizing firm value. This theory explains the result in Paramount v. Time, (7) and also the reason why...