Unregulable Defenses and the Perils of Shareholder Choice

Abstract

A significant debate rages within corporate law scholarship as to whether shareholders or managers should be granted authority over the tender offer process once a bid is imminent. Both sides generally agree that the issue depends on whether shareholders are capable of exercising informed choice over takeover bids. Supporters of managerial veto power contend that the arguments favoring professional management of publicly held firms carry over into the tender offer context. Proponents of shareholder choice, on the other hand, argue that shareholders can act on their own behalf in the special circumstances surrounding contests for corporate control. This Article challenges the premise that the case for shareholder choice turns principally on whether shareholders are capable of making informed choices. It argues that adopting a strong shareholder choice regime may be value reducing even if shareholders can effectively manage the firm post-bid. In particular, a shareholder choice rule would give managers an incentive to search for alternative defenses not practicably regulable by any legal regime-ones that may impose greater costs on the firm than existing defenses. We demonstrate (a) that a number of such unregulable, value-reducing defenses exist, (b) that managerial threats to use them are credible under plausible conditions, and (c) that their use would be difficult or impossible for courts to regulate. Furthermore, we find empirical supportfor these hypotheses. Consequently, we conclude that an immutable, one-sizefits-all shareholder choice rule is unlikely to improve shareholders'welfare.