The Power to Decide on Takeovers: Directors or Shareholders, What Difference Does it Make?

Abstract

I analyze the allocation of the power to decide on hostile takeovers between directors and shareholders. My contribution is to show who actually has power in a takeover and what factors are at work to give such power. Although directors are traditionally considered to be in charge in deciding the outcome of a hostile takeover of a Delaware corporation, shareholders nevertheless may have the power to reverse the outcome via a vote. I argue that even though shareholders sometimes lack the power to determine the outcome of a takeover bid, the reason for that is not embedded in the takeover regime itself, but rather in corporate law rules, principles and/or practices that are external to it and act as barriers to shareholder power. These barriers, which I call “corporate law collateral factors,” include staggered boards, limits to director removability, shareholders’ inability to call special meetings or to act by written consent, supermajority rules, proxy and conflict of interest regimes. This article, which reports original empirical evidence on the number and market capitalization of Delaware companies that are affected by each corporate law collateral factor, argues that scholars and courts have overemphasized the importance of the takeover regime itself rather than the corporate law collateral factors. Policymakers and interpreters should thus address all corporate law collateral factors within the body of takeover law, whether or not statutory. Given the importance of takeovers, it is odd not to conceive tailored rules that acknowledge the existence and impact of such factors. Leaving the corporate law collateral factors in a vacuum to general corporate law does a disservice to takeover players and stakeholders.