Lockups and Delaware Venue in Corporate Law and Bankruptcy

Abstract

This article addresses two issues that have generated enormous debate in both the corporate law and the bankruptcy literature: the use of breakup fees and other lockup provisions, and Delaware's prominence as the nation's leading corporate address. The first half of the Article weighs in on the role of lockup provisions. Corporate law commentators have adopted widely divergent views of the propriety of lockups, with several calling for courts to uphold all lockups and others proposing varying levels and kinds of scrutiny. To make sense of this debate, I show that the existing literature can be distilled to three central issues: 1) commentators' views on the larger corporate law controversy over managers' proper response to unsolicited takeover bids; 2) their views as to whether target managers can or will prove disloyal to shareholders' interests; and 3) their assumptions about the appropriate size of lockups - that is, how much compensation should be allowed. In describing the importance of these three issues, I develop and defend my own normative position. Because lockups can entice managers to accede to a change in control they might otherwise resist, I argue that courts should enforce both first and second bidder lockups. Courts should limit lockup bidders to their reliance interest, however, rather than allowing even larger lockups. Interestingly, the Delaware case law on lockups has evolved in a direction quite similar to the normative approach I defend. I conclude the lockup analysis by considering the role of lockup provisions in bankruptcy. Although many courts and commentators have contended that bankruptcy calls for an entirely different approach to lockups, I argue that the extensive similarities between the two contexts suggest that courts should also apply a reliance-based approach in bankruptcy - though the approach should be tailored to reflect the nature of the bankruptcy decision making process. The second half of the Article considers the longstanding state law charter competition debate. The analysis begins by describing the two traditional views: to the bottom theorists insist that Delaware and other states cater to managers at the expense of shareholders, whereas to the theorists contend that market forces impel managers and states to take shareholder interests into account. Much of the most recent literature leans toward the race to the top view, but concludes that Delaware's dominance enables it to favor local interests such as the Delaware bar. In assessing the literature, I emphasize the moral dimension in the Delaware case law, and show that many of the rules the benefit Delaware lawyers also further Delaware's role as moral arbiter in corporate law. Turning to corporate bankruptcy, I argue that Delaware's increasingly prominent role in bankruptcy offers many of the same benefits as its preeminence in state corporate law. Because corporate bankruptcy is regulated by Congress rather than the states, the analogy is far from perfect. But the similarities make clear that the recent campaign to prohibit large corporate debtors from filing for bankruptcy in Delaware is misguided. Several recent commentators have challenged an earlier article of mine that defended Delaware's popularity as a bankruptcy forum. I conclude by pointing out the problems in their critique.