Academic journal article Stanford Law Review

The Professorial Bear Hug: The ESB Proposal as a Conscious Effort to Make the Delaware Courts Confront the Basic "Just Say No" Question

Academic journal article Stanford Law Review

The Professorial Bear Hug: The ESB Proposal as a Conscious Effort to Make the Delaware Courts Confront the Basic "Just Say No" Question

Article excerpt

As one of the ten Delaware judges to whom the central policy argument of The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy (1) is directed, I am constrained to reply to the excellent, thought-provoking article by Professors Bebchuk, Coates, and Subramanian in a more oblique fashion than the other commentators. For obvious reasons, I will not enter into the normative debate regarding the desirability of hostile takeovers or whether state corporation law should facilitate or impede the ability of acquirors to make, and stockholders to accept, structurally noncoercive, all-shares tender offers. Nor will I comment on the reliability of the empirical evidence that the authors present.

Instead, this brief Response will highlight the basic policy choice that the authors ask the Delaware courts to enshrine in the common law of corporations. The question the authors ask us to decide affirmatively is fundamental: Can control of the corporation be sold over the objections of a disinterested board that believes in good faith that the sale is inadvisable? That is, at bottom, the authors want to force the hand of the Delaware courts to decide, once and for all, that impartial and well-intentioned directors do not have the fiduciary authority to "just say no" for an indefinite--even perpetual--period to a noncoercive tender offer made to their company's shareholders.

Although staggered boards are critical to their proposal, the authors prescribe a judicial cure for a quite different toxin: the poison pill. (2) Thus, the authors have continued a longstanding debate, but in

a particularly valuable way, by forcing the contestants to grapple with empirical facts about the real-world effects of the combined defense of a poison pill and an "Effective Staggered Board" (ESB).

The authors went about their task cleverly. By framing their policy proposal precisely, they have attempted to block off the principal doctrinal route the courts have used to sidestep the fundamental Just Say No issue. Relatedly, their proposal illustrates how bluntly the traditional fiduciary duty tool operates as a substitute for a clear legislative--or judicial--answer to this question of corporate authority. Essentially, the authors seek a clear ruling about the proper allocation of power between stockholders and directors in responding to tender offers, and have made it more difficult for the courts to avoid giving an answer. Although "muddling through" has benefits that arguably exceed those that could be achieved by a bright-line rule, nonetheless, the authors have exposed some of the more obvious logical vulnerabilities that now exist in a common law of takeover defense that has, to date, not forthrightly confronted the bottom-line Just Say No question.

My discussion of these issues breaks out as follows. Part I of this Response, a hypothetical, demonstrates how the authors have purposefully (and craftily) limited the scope of their ESB proposal. In particular, the hypothetical shows how the authors' proposal rests on the premise that a board's decision to block a tender offer with a poison pill involves an exercise of fiduciary power that is categorically different from a board's determination about the corporation's proper business strategy. Typically, independent directors do not breach their fiduciary duty when they take action that is well-motivated and well-informed. The authors' proposal, however, asks the courts to hold that a corporate board does not possess any equitable authority to impede the procession of a tender offer, once the directors have had the chance to develop another better alternative and inform the stockholders about their view that the offer is inadequate, and after they have channeled the initial stockholder referendum on the offer into the director election process.

Part II traces how the Delaware courts have dealt with the extent of directorial authority to use a poison pill to deprive stockholders of an opportunity to sell their shares in a tender offer. …

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