Corporate Policy and the Coherence of Delaware Takeover Law

Authors

Richard E. Kihlstrom, The Wharton School, University of PennsylvaniaFollow
Michael L. Wachter, University of Pennsylvania Carey Law SchoolFollow

Document Type

Article

Publication Date

2003

Abstract

This Article presents a model that can be used to explain key elements of Delaware takeover law. By incorporating corporate policy as a key variable in the model, Delaware law’s management discretion rule can be shown to be best suited for maximizing the value of the corporation and the shareholders’ interest under a set of reasonable assumptions. By allowing for occasional market mispricing and the agency costs associated with managing to the market, we demonstrate that a shareholder choice regime would likely lead to suboptimal investment decisions. In our model, managers are assumed to have better information regarding alternative corporate policies than shareholders but may, in certain circumstances, act to maximize share price in order to insulate themselves from hostile tender offers, even at the expense of maximizing firm value. This theory explains the result in Paramount v. Time, and also why shareholder choice is allowed in limited instances that implicate Revlon duties such as Interco and Paramount v. QVC.

Keywords

Management Discretion Rule, Business Judgment, Shareholder Choice, Paramount Communications, Inc. v. Time, Inc., Hidden Value Model

Publication Title

University of Pennsylvania Law Review

Publication Citation

152 U. Pa. L. Rev. 523 (2003)

Repository Citation

Kihlstrom, Richard E. and Wachter, Michael L., "Corporate Policy and the Coherence of Delaware Takeover Law" (2003). All Faculty Scholarship. 71.
https://scholarship.law.upenn.edu/faculty_scholarship/71