Portal de Periódicos da CAPES

Delaware's Takeover Law: The Uncertain Search for Hidden Value

2002; Northwestern University School of Law; Volume: 96; Issue: 2 Linguagem: Inglês

0029-3571

Bernard S. Black, Reinier Kraakman,

Corporate Governance and Law

It is easy sport to criticize the Delaware takeover cases as inconsistent with the empirical evidence, each other, and a sensible allocation of power between managers and shareholders. We in fact believe all of these things. Here, however, we offer a more sympathetic account of the core Delaware takeover cases. We argue that they reflect an often unstated model, in which a firm's true value is to corporate directors but not to shareholders or potential acquirers. We explore the assumptions needed to make the hidden value model internally consistent, and contrast those assumptions to those that underlie to a visible model in which shareholders and potential acquirers are well informed about firm value or can be made so through disclosure by the target's board. (One outcome of carefully stating the hidden value model's assumptions is to expose the model's problems.) We also address and reject a premium theory, sometimes invoked by the Delaware courts, in which control is a corporate asset that the law protects by imposing Revlon duties on the target's board. Assuming that the Delaware courts continue to embrace hidden value, we argue that takeover decisions should, at a minimum, be governed by a bilateral decisionmaking structure, in which a target board's initial decision to approve an acquisition, block a takeover bid, or choose one bidder over another must be approved or rejected by shareholders. Under this approach, target boards could adopt modest deal protections and say no to a takeover bid by adopting a poison pill, but could not say never by using a staggered board to block a bid after the bidder wins a proxy contest. The courts must also strictly limit efforts by target boards to stuff the ballot box or otherwise after shareholder vote outcomes. I. INTRODUCTION It is good academic fun to trash the Delaware takeover cases as inconsistent with the empirical evidence, each other, and a sensible allocation of power between managers and shareholders. We in fact believe all of these things. In this Article, however, we offer a more sympathetic account that links the core Delaware takeover cases to an often implicit model of the stock market, in which a firm's true economic value is to well-informed corporate directors but not to the company's shareholders or to potential acquirers. Our thesis is that this model underlies the principal Delaware takeover cases, including both those governing defenses against hostile takeover bids, beginning with Unocal v. Mesa Petroleum,1 and those governing friendly corporate sales, starting with Smith v. Van Gorkom2 and Revlon v. MacAndrews & Forbes.3 At first glance, Van Gorkom, Unocal, and Revlon appear to involve three distinctive fact patterns and at least two different areas of corporate law. On its face, Van Gorkom is a business judgment rule case, which found corporate directors to be grossly negligent in approving an armslength sale of the company. By contrast, Unocal is a hostile takeover case that addresses the board's discretion to deploy defensive tactics to defeat a hostile takeover bid, while Revlon is a friendly takeover case which limits the target board's discretion to favor a white knight buyer over a competing hostile bidder, and holds that a board of directors must maximize shareholder value when it sells the company. In fact, however, Van Gorkom should be seen not as a business judgment rule case but as a takeover case that was the harbinger of the then newly emerging Delaware jurisprudence on friendly and hostile takeovers, which included the almost contemporaneous Unocal and Revlon decisions.4 Van Gorkom's unforgiving scrutiny of the Trans Union board's casual sale of their company anticipates Revlon's holding that a target company's board must maximize shareholder value once it decides to sell the company.5 Less obvious is that Van Gorkom also introduced the core justification for board discretion that was developed in the takeover defense cases, beginning with Unocal and continuing through Moran v. …