I ran across an interesting paper recently by Harry G. Hutchison, Director Primacy and Corporate Governance: Shareholder Voting Rights Captured By the Accountability/Authority Paradigm, 36 Loy. U. Chi. L.J. 1111 (2005), which deploys my director primacy model to very good effect in analyzing shareholder voting rights. I put the abstract below the fold.
Abstract: Claims calculated to defend the shareholder franchise are often riveted by fears of insufficient accountability including those related to the fiduciary obligations of loyalty, good faith and care. Fretfulness about the shareholder franchise requires positioning along a continuum between accountability and authority as part of the interplay between Blasius and Unocal. The real question is whether Blasius adds anything in the context of a takeover battle despite the questionable claim that outside of contest for control, Blasius supplies an independent standard of review that properly constrains directorial discretion.
It has been suggested that the application of Blasius alongside Unocal is functionally unhelpful and unnecessary. If correct, then the relationship between Blasius and Unocal/Unitrin doctrines is a fruitful subject for some doctrinal pruning. Although the case-law indicates that the board can neither completely block shareholders from receiving tender offers, nor halt all proxy contests, the compelling justification criterion, recently revitalized by MM Companies, Inc. v. Liquid Audio, Inc., raises questions pertaining to whether, and to what extent, Delaware courts will also apply the stringent Blasius standard of review where the actual ability to obtain control is not thwarted but where the challenged action merely dilutes the "substantial presence" of an insurgent on that board. It is possible that allowing the dilution of the influence of a potentially hostile bidder is consistent with the assumption that directors should retain discretionary control of a hierarchy that comes in the corporate form. By contrast, Liquid Audio, apparently, presents a model of when the compelling justification standard of Blasius must be applied within Unocal's requirement that any defensive measure be proportionate and reasonable in relation to the threat posed. The case implicates two contrasting conceptions of corporate governance: (A) that the power of managing the corporate enterprise is vested in the shareholders' duly elected board representatives; and (B) that shareholders as principals are not simply captives of the business judgment of directors who purportedly act as their agents; hence, authority remains firmly in the hands of stockholders. Additionally, this case involves another crucial tension in corporate governance today: the tension between deference to directors' decisions and the scope of judicial review.
I apply director primacy analysis to criticize the courts and the predisposition of commentators to favor shareholder governance by exposing their opinions to the implications derived from the two principal alternative approaches to corporate governance - authority and accountability. Favoring the authority model that inevitably promotes director primacy, I contend shareholder choice may have little independent normative significance and that the appropriate, but necessarily limited, question is whether a board's decision foreclosing shareholder choice was based on proper or improper motives. In other words, did the board exercise its prerogative in ways that suggest that the transaction was driven by management self-interest? Or on the other hand, was the board properly motivated in its justifiable exercise of its discretion?
Download here.
