Document Type

Article

Publication Date

2003

Abstract

Constitutions constitute a polity and create and entrench power. A corporate constitution - the governance choices incorporated in state law and the certificate of incorporation - resembles a political constitution. Delaware law allows parties to create corporations, to endow them with perpetual life, to assign rights and duties to "citizens" (directors and shareholders), to adopt a great variety of governance structures, and to entrench those choices. In this Article, we argue that the decision to endow directors with significant power over decisions whether and how to sell the company is a constitutional choice of governance structure. We then argue that it is, on theoretical and empirical grounds, a perfectly intelligible choice: shareholders reasonably might opt for board entrenchment - implemented, for example, by means of a staggered board - in order to enable a board to employ selling strategies more effectively and thus to increase the premium shareholders receive when the company is sold. Such a decision is a kind of pre-commitment whereby shareholders, by binding themselves ex ante, may be able to improve their collective position ex post. After examining how shareholders can entrench particular governance structures under Delaware law, we examine two issues that arise once shareholders have chosen to entrench a governance structure: the question of incomplete implementation that arises in cases such as Blasius and Liquid Audio; and the questions when and whether changed circumstances justify ex post judicial negation of shareholders' prior commitments.

Comments

152 U. Pa. L. Rev. 473 (2003)

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