While I was in New Zealand, Ronald Gilson and Jeffrey Gordon posted an interesting essay on the Sotheby's activist pill and the Delaware decision affirming it. They begin with an interesting point:
Delaware corporate governance rests on two conflicting premises: on the one hand, the board of directors and the management the board selects run the corporation’s business, but on the other the shareholders vote on who the directors are. The board needs discretion to run the business, but the shareholders decide when the board’s performance is so lacking that it (and management) should be replaced. All of the most interesting issues in corporate governance arise when these two premises collide – when the board’s assessment of how the company is doing is different than the shareholders’, and each claims that their assessment controls.
I agree with the claim that this is the interesting wedge point in corporate law. For my take on how issues at the boundary should be decided, see The Case for Limited Shareholder Voting Rights. UCLA Law Review, Vol. 53, pp. 601-636, 2006. Available at SSRN: http://ssrn.com/abstract=887789.
But I take issue with their characterization of Delaware's takeover jurisprudence:
Delaware law’s current framework is based on a belief about the distribution of public shareholders – they are largely small shareholders who have neither the skills nor the time to really assess what management is doing. Central to Delaware’s embrace of the poison pill was the belief that these shareholders would be taken in by hostile raiders because they did not really understand the corporation’s value. ...
The Delaware courts never had to confront the cognitive contradiction between their attitude toward hostile bids (boards can intervene to protect ignorant shareholders) and proxy contests (boards cannot challenge the electoral power of the same shareholders, presumably still ignorant), because proxy contests were (mostly) an empty threat to managerial control.
I don't think a theory of shareholder ignorance is the basis of Delaware's takeover jurisprudence. In Unocal at 20: Director Primacy in Corporate Takeovers. Delaware Journal of Corporate Law, Vol. 31, No. 3, pp. 769-862, 2006, available at SSRN: http://ssrn.com/abstract=946016, I argued that:
Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not.
My explanation for Unocal thus would justify the outcome of that case regardless of whether shareholders are ignorant or not and, crucially, regardless of whether shareholders are retail individuals or mega-institutions.
But, anyway, go read the whole thing.
