The Best of All Possible Worlds (Or Pretty Darn Close)

Abstract

Marcel Kahan and Edward Rock's Article, How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law,1 captures an intuition that has come to dominate the middle ground between supporters and critics of Delaware's takeover jurisprudence. This is the view that management's discretion to defeat hostile takeovers under Delaware law just does not matter much today. The reason is not that the current law is right -or wrong. Rather it is because offsetting developments within the corporation -option compensation and active boards-have made managers far more receptive to selling their companies today than they were during the turbulent 1980s. Kahan and Rock present a stylized history of the takeover market in three parts. First there was the big bang, an exogenous shock in the early 1980s that sharply increased hostile takeovers. This wave of hostile takeovers lasted only a few years, however. It soon was followed by a second period in which takeover activityand hostile takeovers in particular -fell precipitously. Although the economy was largely responsible for this change, legal and corporate governance developments also contributed to it. During the midand late 1980s, state legislatures adopted antitakeover legislation, while management and its allies experimented with defensive tactics. Management's efforts at self-help culminated in the poison pill, which the Delaware Supreme Court blessed, at least provisionally, in 1986. The pill placed management back in the catbird seat, able to block hostile takeovers without seeking shareholder approval. But the system still was not in equilibrium. There was no turning back the clock; shareholders still wanted the takeover premia that accompanied a robust flow of deals. Equilibrium returned to the system only in the third and final period, beginning around 1992, when option compensation plans and independent boards of directors combined to spark a new wave of friendly acquisitions that profited both shareholders and the managers of target companies.