Delaware's takeover law: The uncertain search for hidden value

Northwestern University Law Review

Volumn 96, Issue 2, 2002, Pages 521-565

  Black, Bernard ^a   Kraakman, Reinier ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0040669878     PISSN: 00293571     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (132)

1. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
2. 488 A.2d 858 (Del. 1985).
3. Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1986).
4. This point was articulated by Jon Macey and Geoffrey Miller. See Jonathan R. Macey & Geoffrey P. Miller, Trans Union Reconsidered, 98 YALE L.J. 127, 135-40 (1988). The Macey-Miller view of Van Gorkom was a minority view at the time. See. e.g., Eric A. Chiappinelli, Trans Union Unreconsidered, 15 J. CORP. L. 27 (1989) (arguing that Van Gorkom is a business judgment rule case with application to all board decisions).
5. This point was articulated by Jon Macey and Geoffrey Miller. See Jonathan R. Macey & Geoffrey P. Miller, Trans Union Reconsidered, 98 YALE L.J. 127, 135-40 (1988). The Macey-Miller view of Van Gorkom was a minority view at the time. See. e.g., Eric A. Chiappinelli, Trans Union Unreconsidered, 15 J. CORP. L. 27 (1989) (arguing that Van Gorkom is a business judgment rule case with application to all board decisions).
6. Revlon, 506 A.2d at 175-76.
7. 500A.2d 1346, 1357 (Del. 1985).
8. Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1142 (Del. 1990).
9. Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1993).
10. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995).
11. See Ronald J. Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 BUS. LAW. 247, 259-65 (1989). The term "substantive coercion," introduced in this article, was adopted by the Delaware Supreme Court in Paramount v. Time, 571 A.2d at 1153 n.17. Hidden value and substantive coercion can be viewed as two sides of the same coin. Hidden value is what the board sees; substantive coercion is what the shareholders would suffer, if the board allowed them to, because the shareholders don't see the firm's hidden value.
12. See Ronald J. Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 BUS. LAW. 247, 259-65 (1989). The term "substantive coercion," introduced in this article, was adopted by the Delaware Supreme Court in Paramount v. Time, 571 A.2d at 1153 n.17. Hidden value and substantive coercion can be viewed as two sides of the same coin. Hidden value is what the board sees; substantive coercion is what the shareholders would suffer, if the board allowed them to, because the shareholders don't see the firm's hidden value.
13. The classic example is the British City Code regime, which denies target boards the power to implement defensive tactics after a hostile bid is made. See PANEL ON TAKEOVERS AND MERGERS, THE CITY CODE ON TAKE-OVERS AND MERGERS (1993) [hereinafter CITY CODE]. The City Code prescribes detailed ex ante regulation for tender offers and mergers that contrasts sharply with the common law regulation of takeovers under U.S. corporate law. The Takeover Panel is a self-regulatory body that enforces the City Code. Its rules and decisions are binding because companies that do not comply will be delisted from the London Stock Exchange.
14. See DEL. CODE ANN. tit. 8, §§ 242 (1991) (charter amendments), 251 (mergers), 271 (sale of all or substantially all assets). Our advocacy of bilateral decisionmaking is similar to a position long held by Marcel Kahan, although we offer this position with less enthusiasm and base it on a very different analysis of the Delaware takeover cases. See Marcel Kahan, Paramount or Paradox: The Delaware Supreme Court's Takeover Jurisprudence, 19 J. CORP. L. 583 (1994).
15. See DEL. CODE ANN. tit. 8, §§ 242 (1991) (charter amendments), 251 (mergers), 271 (sale of all or substantially all assets). Our advocacy of bilateral decisionmaking is similar to a position long held by Marcel Kahan, although we offer this position with less enthusiasm and base it on a very different analysis of the Delaware takeover cases. See Marcel Kahan, Paramount or Paradox: The Delaware Supreme Court's Takeover Jurisprudence, 19 J. CORP. L. 583 (1994).
16. For a sampling of the academic and practitioner commentary on Van Gorkom, see the other articles in this Symposium and also R. Franklin Balotti & Mark J. Gentile, Commentary from the Bar: Elimination or Limitation of Director Liability for Delaware Corporations, 12 DEL J. CORP. L. 5 (1987); Chiappinelli (1989), supra note 4; Leo Herzel & Leo Katz, Smith v. Van Gorkom: The Business of Judging Business Judgment, 41 BUS. LAWYER 1187 (1986); Macey & Miller (1988), supra note 4; and E. Norman Veasey, The New Incarnation of the Business Judgment Rule in Takeover Defenses, 11 DEL. J. CORP. L. 503 (1986).
17. For a sampling of the academic and practitioner commentary on Van Gorkom, see the other articles in this Symposium and also R. Franklin Balotti & Mark J. Gentile, Commentary from the Bar: Elimination or Limitation of Director Liability for Delaware Corporations, 12 DEL J. CORP. L. 5 (1987); Chiappinelli (1989), supra note 4; Leo Herzel & Leo Katz, Smith v. Van Gorkom: The Business of Judging Business Judgment, 41 BUS. LAWYER 1187 (1986); Macey & Miller (1988), supra note 4; and E. Norman Veasey, The New Incarnation of the Business Judgment Rule in Takeover Defenses, 11 DEL. J. CORP. L. 503 (1986).
18. For a sampling of the academic and practitioner commentary on Van Gorkom, see the other articles in this Symposium and also R. Franklin Balotti & Mark J. Gentile, Commentary from the Bar: Elimination or Limitation of Director Liability for Delaware Corporations, 12 DEL J. CORP. L. 5 (1987); Chiappinelli (1989), supra note 4; Leo Herzel & Leo Katz, Smith v. Van Gorkom: The Business of Judging Business Judgment, 41 BUS. LAWYER 1187 (1986); Macey & Miller (1988), supra note 4; and E. Norman Veasey, The New Incarnation of the Business Judgment Rule in Takeover Defenses, 11 DEL. J. CORP. L. 503 (1986).
19. For a sampling of the academic and practitioner commentary on Van Gorkom, see the other articles in this Symposium and also R. Franklin Balotti & Mark J. Gentile, Commentary from the Bar: Elimination or Limitation of Director Liability for Delaware Corporations, 12 DEL J. CORP. L. 5 (1987); Chiappinelli (1989), supra note 4; Leo Herzel & Leo Katz, Smith v. Van Gorkom: The Business of Judging Business Judgment, 41 BUS. LAWYER 1187 (1986); Macey & Miller (1988), supra note 4; and E. Norman Veasey, The New Incarnation of the Business Judgment Rule in Takeover Defenses, 11 DEL. J. CORP. L. 503 (1986).
20. For a sampling of the academic and practitioner commentary on Van Gorkom, see the other articles in this Symposium and also R. Franklin Balotti & Mark J. Gentile, Commentary from the Bar: Elimination or Limitation of Director Liability for Delaware Corporations, 12 DEL J. CORP. L. 5 (1987); Chiappinelli (1989), supra note 4; Leo Herzel & Leo Katz, Smith v. Van Gorkom: The Business of Judging Business Judgment, 41 BUS. LAWYER 1187 (1986); Macey & Miller (1988), supra note 4; and E. Norman Veasey, The New Incarnation of the Business Judgment Rule in Takeover Defenses, 11 DEL. J. CORP. L. 503 (1986).
21. The court complains about the adequacy of the market check and the disclosure preceding the shareholder vote, but both seem ample to us and to most of the commentators who have written about the opinion. Reading the opinion as a whole, we think it unlikely that a stronger market check would have changed the court's decision.
22. Smith v. Van Gorkom, 488 A.2d 858, 877-78 (Del. 1985).
23. Id. at 874.
24. See Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173, 182 (Del. 1986).
25. Id. at 185.
26. See, e.g., Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (noting that, in considering whether to implement takeover defenses, a target board may consider, inter alia, the impact of a bid "on 'constituencies' other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally ...)"); Paramount v. Time, 571 A.2d at 1155 (quoting this language from Unocal); id. at 1152 (noting with approval the Time board's "zealousness ... in seeing to the preservation of Time's 'culture'").
27. The Delaware Supreme Court has signaled both long-term shareholder primacy and the broad scope of board discretion by observing that Unocal is not intended to lead to a simple mathematical exercise: that is, of comparing the discounted value of Time-Warner's [the target company's] at some future date with Paramount's [the hostile bidder's] offer and determining which is higher. Indeed, in our view, precepts underlying the business judgment rule militate against a court's engaging in the process of attempting to appraise and evaluate the relative merits of a long-term versus a short-term investment goal for shareholders. Paramount Communications, Inc. v. Time, 571 A.2d 1140, 1153 (Del. 1990).
28. This Article is not the place to analyze Paramount v. Time with care. Suffice it to say that the Time board's original stock-for-stock merger with Warner, which gave 62% of Time's post-merger shares to Warner shareholders and would have produced a Time share price of around $100, could not have been better for shareholders than a sale to Paramount at the $200 per share Paramount had offered, let alone the higher price it had signaled its willingness to pay, unless one assumes that the market made errors of implausible size in valuing Time, Warner, or the synergy between the two companies. Assume, for example, that Warner's market value was correct (Time's board had little unique insight into Warner's value), and that the expected synergy was just enough to compensate for the premium that Time would pay for Warner shares (a high level of synergy was implausible because much of Time had little overlap with much of Warner). Time would then have to be worth an astonishing $363 per share for shareholders to do as well in the initially proposed merger as they would with the $200 Paramount offer. This number is so high because the merger would convey 62% of Time's hidden value to Warner's shareholders. For Time's shareholders to receive $100 per share in hidden value, the actual hidden value per share would have to be $100/(.38) = $263. For further discussion of Paramount v. Time, see RONALD GILSON & BERNARD BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISITIONS ch. 1 (2d ed. 1995); Jeffrey Gordon, Corporations, Markets, and Courts, 91 COLUM. L. REV. 1931 (1991). For a retrospective analysis of Time-Warner's share price versus Paramount's offer, see Ronald J. Gilson, Lipton and Rowe's Apologia for Delaware: A Short Reply, DEL. J. CORP. L. (forthcoming 2002).
29. This Article is not the place to analyze Paramount v. Time with care. Suffice it to say that the Time board's original stock-for-stock merger with Warner, which gave 62% of Time's post-merger shares to Warner shareholders and would have produced a Time share price of around $100, could not have been better for shareholders than a sale to Paramount at the $200 per share Paramount had offered, let alone the higher price it had signaled its willingness to pay, unless one assumes that the market made errors of implausible size in valuing Time, Warner, or the synergy between the two companies. Assume, for example, that Warner's market value was correct (Time's board had little unique insight into Warner's value), and that the expected synergy was just enough to compensate for the premium that Time would pay for Warner shares (a high level of synergy was implausible because much of Time had little overlap with much of Warner). Time would then have to be worth an astonishing $363 per share for shareholders to do as well in the initially proposed merger as they would with the $200 Paramount offer. This number is so high because the merger would convey 62% of Time's hidden value to Warner's shareholders. For Time's shareholders to receive $100 per share in hidden value, the actual hidden value per share would have to be $100/(.38) = $263. For further discussion of Paramount v. Time, see RONALD GILSON & BERNARD BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISITIONS ch. 1 (2d ed. 1995); Jeffrey Gordon, Corporations, Markets, and Courts, 91 COLUM. L. REV. 1931 (1991). For a retrospective analysis of Time-Warner's share price versus Paramount's offer, see Ronald J. Gilson, Lipton and Rowe's Apologia for Delaware: A Short Reply, DEL. J. CORP. L. (forthcoming 2002).
30. This Article is not the place to analyze Paramount v. Time with care. Suffice it to say that the Time board's original stock-for-stock merger with Warner, which gave 62% of Time's post-merger shares to Warner shareholders and would have produced a Time share price of around $100, could not have been better for shareholders than a sale to Paramount at the $200 per share Paramount had offered, let alone the higher price it had signaled its willingness to pay, unless one assumes that the market made errors of implausible size in valuing Time, Warner, or the synergy between the two companies. Assume, for example, that Warner's market value was correct (Time's board had little unique insight into Warner's value), and that the expected synergy was just enough to compensate for the premium that Time would pay for Warner shares (a high level of synergy was implausible because much of Time had little overlap with much of Warner). Time would then have to be worth an astonishing $363 per share for shareholders to do as well in the initially proposed merger as they would with the $200 Paramount offer. This number is so high because the merger would convey 62% of Time's hidden value to Warner's shareholders. For Time's shareholders to receive $100 per share in hidden value, the actual hidden value per share would have to be $100/(.38) = $263. For further discussion of Paramount v. Time, see RONALD GILSON & BERNARD BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISITIONS ch. 1 (2d ed. 1995); Jeffrey Gordon, Corporations, Markets, and Courts, 91 COLUM. L. REV. 1931 (1991). For a retrospective analysis of Time-Warner's share price versus Paramount's offer, see Ronald J. Gilson, Lipton and Rowe's Apologia for Delaware: A Short Reply, DEL. J. CORP. L. (forthcoming 2002).
31. This Article is not the place to analyze Paramount v. Time with care. Suffice it to say that the Time board's original stock-for-stock merger with Warner, which gave 62% of Time's post-merger shares to Warner shareholders and would have produced a Time share price of around $100, could not have been better for shareholders than a sale to Paramount at the $200 per share Paramount had offered, let alone the higher price it had signaled its willingness to pay, unless one assumes that the market made errors of implausible size in valuing Time, Warner, or the synergy between the two companies. Assume, for example, that Warner's market value was correct (Time's board had little unique insight into Warner's value), and that the expected synergy was just enough to compensate for the premium that Time would pay for Warner shares (a high level of synergy was implausible because much of Time had little overlap with much of Warner). Time would then have to be worth an astonishing $363 per share for shareholders to do as well in the initially proposed merger as they would with the $200 Paramount offer. This number is so high because the merger would convey 62% of Time's hidden value to Warner's shareholders. For Time's shareholders to receive $100 per share in hidden value, the actual hidden value per share would have to be $100/(.38) = $263. For further discussion of Paramount v. Time, see RONALD GILSON & BERNARD BLACK, THE LAW AND FINANCE OF CORPORATE ACQUISITIONS ch. 1 (2d ed. 1995); Jeffrey Gordon, Corporations, Markets, and Courts, 91 COLUM. L. REV. 1931 (1991). For a retrospective analysis of Time-Warner's share price versus Paramount's offer, see Ronald J. Gilson, Lipton and Rowe's Apologia for Delaware: A Short Reply, DEL. J. CORP. L. (forthcoming 2002).
32. For an effort to develop a formal model that overlaps with the hidden value model, see Andrei Shleifer & Robert W. Vishny, Stock Market Driven Acquisitions (Nat'l Bureau of Econ. Research Working Paper No. 8439, Aug. 2001), available at http://papers.ssm.com/abstract=280292 (developing a model of takeovers in which managers are loyal and know firms' true value, while shareholders do not). For an effort to stress that academic skepticism about Delaware's takeover rules rests as much on concern about agency costs as on belief that market prices are efficient, see Gilson (2002), supra note 21.
33. For an effort to develop a formal model that overlaps with the hidden value model, see Andrei Shleifer & Robert W. Vishny, Stock Market Driven Acquisitions (Nat'l Bureau of Econ. Research Working Paper No. 8439, Aug. 2001), available at http://papers.ssm.com/abstract=280292 (developing a model of takeovers in which managers are loyal and know firms' true value, while shareholders do not). For an effort to stress that academic skepticism about Delaware's takeover rules rests as much on concern about agency costs as on belief that market prices are efficient, see Gilson (2002), supra note 21.
34. See, e.g., ROBERT A.G. MONKS & NELL MINOW, POWER AND ACCOUNTABILITY 93-94 (1991). On the implausibility of the Time board's judgment, see supra, note 21.
35. See, e.g., ROBERT A.G. MONKS & NELL MINOW, POWER AND ACCOUNTABILITY 93-94 (1991). On the implausibility of the Time board's judgment, see supra, note 21.
36. There are surely cases where the target has unique synergy with a particular buyer. In this case, if all buyers know each others' reservation prices, the best buyer will offer just enough to beat the second best offer, and will capture the gains from the unique synergy. In more complex, imperfect information and bilateral negotiation models, the unique synergy gains will be shared between the target and the best buyer. Unique synergy can make the corporate control market imperfectly competitive, in a sense. But it is not apparent how unique synergy can justify the board in not selling to anyone, which ensures that the unique synergy will be lost.
37. General Principle 7 of the British City Code prohibits "any action to be taken by the board of the offeree company in relation of the affairs of the offeree company, without the approval of the shareholders in a general meeting, which could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits." CITY CODE, supra note 11. Rule 21 of the City Code expands upon this principle.
38. Paramount Communications, Inc. v. Time, Inc., 1989 WL 79880 at *18 (Del Ch. July 14, 1989).
39. Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 42-43 (Del. 1993). In brief, the Delaware Supreme Court, in dictum in Paramount Communications, Inc. v. Time, 571 A.2d 1140, 1150-51 (Del. 1990), construed Revlon narrowly to apply only when a company auctions itself, or decides to break itself up into pieces. Four years later, after a change in personnel, the Delaware Supreme Court in Paramount v. QVC broadened the scope of Revlon to apply to any "change of control." 637 A.2d at 48. Paramount v. QVC purports to interpret, but in practice overrules, the narrow reading of Revlon in Paramount v. Time, and reinstates much of the Chancery Court's analysis in Paramount v. Time, which the Supreme Court had rejected at the time.
40. For discussion of how this political pressure likely affected Delaware doctrine, see Ronald J. Gilson, Unocal Fifteen Years Later (and What We Can Do About It), 26 DEL. J. CORP. L. 491 (2001); Gordon ( 1991 ), supra note 21.
41. For discussion of how this political pressure likely affected Delaware doctrine, see Ronald J. Gilson, Unocal Fifteen Years Later (and What We Can Do About It), 26 DEL. J. CORP. L. 491 (2001); Gordon ( 1991 ), supra note 21.
42. 559 A.2d 1261, 1264-65 (Del. 1989).
43. QVC, 637 A.2d at 43 (holding that a change of control will be found in a stock-for-stock merger if the buyer has a controlling shareholder). Revlon duties are also triggered, as in Paramount v. QVC, if the acquirer has a controlling shareholder control after the acquisition.
44. For an early analysis of the scope of Revlon, see Ronald J. Gilson & Reinier Kraakman, What Triggers Revlon?, 25 WAKE FOREST L. REV. 37 (1990). Gilson and Kraakman proposed a form of the sale of control test in which a board sells control by either approving the sale of a controlling block of stock or relinquishing managerial control of the surviving company in a merger transaction. This test was motivated by the agency problems that arise during a management team's "final period" before leaving the company. Consistent with its general pattern of de-emphasizing managerial agency problems, however, the Delaware Supreme Court chose to look only to share ownership in framing its control test.
45. QVC, 637 A.2d at 43; see also Leo E. Strine, Jr., Categorical Confusion: Deal Protection Measures in Stock-for-Stock Merger Agreements, 56 BUS. LAW. 919, 927 n.25 (2001) (amplifying QVC's discussion of the control premium theory).
46. QVC, 637 A.2d at 43; see also Leo E. Strine, Jr., Categorical Confusion: Deal Protection Measures in Stock-for-Stock Merger Agreements, 56 BUS. LAW. 919, 927 n.25 (2001) (amplifying QVC's discussion of the control premium theory).
47. In fact, the low premium that investors accord to voting over nonvoting shares, for companies with two classes of voting shares, suggests that control, without more, has limited value. See Tatiana Nenova, The Value of Corporate Votes and Control Benefits: A Cross-Country Analysis (working paper 2000), available at http://papers.ssrn.com/abstract=237809 (value of voting rights for sample of 39 U.S. companies with two classes of voting stock is about 2% of firm value).
48. By contrast, transaction type (iii) might not trigger Revlon under the hidden value model. Instead, it might be analogized to paying target shareholders mixed consideration in a merger: 98% payment in acquirer stock - a currency with potential hidden value - and 2% payment in minority target stock - a currency without cognizable hidden value. A court might reason that the purchase of nearly all target stock with acquirer stock creates enough potential for hidden value to excuse Revlon duties. Nevertheless, Revlon duties would have to attach at some point in this class of transactions, as an acquirer purchases a progressively lower percentage of target stock. Cf. Part III.B infra (discussing the application of Revlon to change-of-control transactions). Were case (iii) to arise, the Delaware courts might be forced to choose between the hidden value model and the control premium theory.
49. Much the same critique that we make of the control premium theory can be made of any theory that focuses on what an acquirer, armed with control, might do to minority shareholders in the future. A rational target board can anticipate future risks and demand that the target's shareholders be paid for bearing them ex ante. The issue here, as in every transaction, is whether the target shareholders have been paid enough. For example, Marcel Kahan has proposed that Revlon duties should apply when, because of the sale of a controlling stake, target shareholders lose the ability to reverse a board decision to reject a takeover bid for the firm. See Kahan (1994), supra note 12, at 595. But if target shareholders are paid enough for selling control - if they take their premium up front, so to speak - there remains no good reason why transactions that transfer control should be treated differently, doctrinally, than stock-for-stock mergers that do not, but do transfer all of a firm's other assets.
50. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985) (deference to the board's decision to resist a takeover bid "is materially enhanced, as here, by the approval of a board comprised of a majority of outside independent directors").
51. See Gilson (2001), supra note 28, at 499 (describing Delaware's acceptance of takeover defenses, under Unocal and its progeny, as reflecting an unexplained preference for takeover contest decisions to be decided through elections rather than markets).
52. For an effort to take distrust of shareholder decisions to its logical conclusion by restricting their power to remove directors to once in five years, see Martin Lipton & Steven A. Rosenblum, A New System of Corporate Governance: The Quinquennial Election of Directors, 58 U. CHI. L. REV. 187 (1991).
53. We address in this Article the implications of the hidden value model for the decision by the board of the target company. The acquirer's board may also rely on hidden transactional value, usually prospective synergies, to justify paying a large premium over the target's pre-announcement market price, however negatively the market views the acquisition. An acquirer can also potentially gain from its own negative hidden value, by acquiring another company using its overpriced shares as consideration. See Shleifer & Vishny (2001), supra note 22 (suggesting AOL's acquisition of Time-Warner as a possible example of this fact pattern).
54. Discussion of the implications of the hidden value model for analysis of deal protections is beyond the scope of this article. In brief, within the visible value model, granting a first-bidder lockup option will not change the expected price that target shareholders will receive. The first bidder is induced to pay more, at the same time that higher second bids are dissuaded. The two effects on expected price precisely offset each other. If hidden value exists, deal protections can potentially increase or decrease the expected price that target shareholders will receive.
55. An exception to this general rule is a leveraged buyout, where the acquirer is a shell (or much smaller than the target), so that the target's business provides the principal source of cash to repay the debt. Here, the target's board could plausibly have significant information that bears on the value of the acquirer's debt securities. But note a twist. The target's board typically claims that hidden value is positive, to justify resisting a takeover bid or preferring a stock bid to an apparently higher cash or debt offer. But if the target's shares have positive hidden value, debt whose repayment relies on the target's cash flow will also have positive hidden value. Despite Unocal's endorsement of this precise move by Unocal's board (which claimed simultaneously that Unocal shares were worth much more than Mesa's $54 offer price, and that the junk bonds Mesa was offering were worth far less than the $54 Mesa claimed they were worth), see Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 956 (Del. 1985), the target's board cannot simultaneously maintain that the market undervalues the target shares and over-values the debt securities that a leveraged buyout acquirer offers in exchange for the target's shares.
56. 559 A.2d 1261, 1287-88 (Del. 1989).
57. Paramount Communications, Inc. v. Time, Inc., 1989 WL 79880, at *18-25 (Del. Ch. July 14, 1989).
58. See Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 43 (Del. 1993) ("Irrespective of the present Paramount Board's vision of a long-term strategic alliance with Viacom [the acquiring company], the proposed sale of control would provide the new controlling stockholder with the power to alter that vision.").
59. One can construct numerical examples of partial stock-for-stock acquisitions, in which target shareholders who become acquirer shareholders gain more from hidden value than the remaining target shareholders lose, relative to visible value. Assume, for example, that a target has 100 shares outstanding, a market price of $40 per share, visible value in the corporate control market of $50 per share, and total value of $60 (including both stand-alone value and synergy with the acquirer); an acquirer has 150 shares outstanding, which trade for $45 each; the acquirer buys 90 target shares for 1 acquirer share each (thus delivering apparent value of $45 per target share), and after the transaction closes, the target's remaining shares will be worth $45, with the acquirer appropriating all target value over $45 per share. After the transaction, the acquirer will have 240 shares outstanding. The total value of the combined firms will be acquirer value + target value = $6750 + $6000 = $12,750. The target's 20 remaining minority shares will receive value of $45 per share, or $450 total, leaving $12,300 ($51.25 per share) for the acquirer's shareholders. Former target shareholders who sell their shares will have shares worth $51.25/share × 90 shares = $4,612.50. The remaining target shareholders will have shares worth $450, for total value to all target shareholders of $5,062.50 (a blended value of $50.63/share), which exceeds the visible value of $50 available from the alternative transaction. Put differently, the target shareholders who sell their shares gain more, relative to visible value, than the target shareholders who keep their shares lose. In our judgment, the Delaware courts are unlikely to engage in this sort of refined analysis, in order to exclude from Revlon scrutiny an unknown but small number of stock-for-stock acquisitions by widely held acquirers of a controlling but less than 100% interest in a target. Thus, the best view is that stock-for-stock acquisitions of a controlling but less than 100% interest should trigger Revlon, just as cash acquisitions do.
60. AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103 (Del. 1986), involves this fact pattern, but was decided under Unocal, with the court holding that a structurally coercive defensive selftender was an unreasonable response to an any-and-all hostile tender offer.
61. The same logic would apply to a stock-for-stock acquisition, where the acquirer plans to break up the target. The acquirer will expect to obtain only visible value for the target businesses it plans to sell, and thus will be willing to pay only visible value for these businesses.
62. 6150 A.2d 1270, 1289-90 (Del. 1994). For background on this transaction, including the relative sizes of buyer and target, see Arnold v. Society for Savings, Again, CORP. CONTROL ALERT, Sept. 1995, at 11.
63. Society for Savings, 650 A.2d at 1290.
64. See Ian Ayres, Analyzing Stock Lock-Ups: Do Target Treasury Sales Foreclose or Facilitate Takeover Auctions?, 90 COLUM. L. REV. 682 (1990).
65. For an argument that target boards should have this discretion, see Stephen Fraidin & Jon D. Hanson, Toward Unlocking Lockups, 103 YALE L.J. 1739 (1994).
66. For a recent example of added deference when a board conducts a market check, see In re Pennaco Energy Inc. Shareholder Litigation, 2001 WL 115341 (Del. Ch. Feb. 5, 2001) and Charles Richards & J. Travis Laster, The Return of the Market Check, INSIGHTS, June 2001, at 20.
67. For a recent example of added deference when a board conducts a market check, see In re Pennaco Energy Inc. Shareholder Litigation, 2001 WL 115341 (Del. Ch. Feb. 5, 2001) and Charles Richards & J. Travis Laster, The Return of the Market Check, INSIGHTS, June 2001, at 20.
68. Given the risk that the board will err or act disloyally, plus the plasticity of investment banker opinions, we believe the courts should require the investment banker to affirmatively conclude that a transaction with lower visible value has higher, not just equal, value compared to the available alternatives, before the board can accept the offer with lower visible value. If the most an investment banker is willing to say is that the two alternatives are equal, the courts should require the board to accept the higher visible value transaction.
69. On the amount of hidden value needed to justify the Time board's preference for the Warner mergerlapproved, over the Paramount offer it rejected, see supra note 21. On the plausible amount of hidden value for companies generally, see infra Part IV.B.3.
70. On the amount of hidden value that is plausible, see infra Part IV.B.3. We are not holding our breath waiting for the courts to impose meaningful procedural and plausibility discipline on target boards. One of us has made such a proposal before, in the article that coined the term "substantive coercion." The Delaware courts adopted the term but ignored the proposals therein for imposing some discipline on hidden value claims. See Gilson & Kraakman (1989), supra note 10, at 266-71.
71. On the sensitivity of long-run event studies to model specification, see Brad M. Barber & John D. Lyon, Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, 43 J. FIN. ECON. 341 (1997); Brad M. Barber & John D. Lyon, Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics, 41 J. FIN. ECON. 359 (1996); S.P. Kothari & Jerold B. Warner, Measuring Long-Horizon Security Price Performance, 43 J. FIN. ECON. 301 (1997).
72. On the sensitivity of long-run event studies to model specification, see Brad M. Barber & John D. Lyon, Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, 43 J. FIN. ECON. 341 (1997); Brad M. Barber & John D. Lyon, Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics, 41 J. FIN. ECON. 359 (1996); S.P. Kothari & Jerold B. Warner, Measuring Long-Horizon Security Price Performance, 43 J. FIN. ECON. 301 (1997).
73. On the sensitivity of long-run event studies to model specification, see Brad M. Barber & John D. Lyon, Detecting Long-Run Abnormal Stock Returns: The Empirical Power and Specification of Test Statistics, 43 J. FIN. ECON. 341 (1997); Brad M. Barber & John D. Lyon, Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics, 41 J. FIN. ECON. 359 (1996); S.P. Kothari & Jerold B. Warner, Measuring Long-Horizon Security Price Performance, 43 J. FIN. ECON. 301 (1997).
74. This general pattern is reported by two major studies. See Michael Bradley, Anand Desai & E. Han Kim, The Rationale Behind Interfirm Tender Offers: Information or Synergy?, 11 J. FIN. ECON. 183 (1983); Richard S. Ruback, Do Target Shareholders Lose in Unsuccessful Control Contests?, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES 137 (Alan J. Auerbach ed., 1988). Bradley, Desai, and Kim examined 26 targets of failed tender offers that were not subsequently acquired by a second offerer. They found that, over a two-year period, the shareholders of these targets lost all gains associated with their offers. Bradley, Desai & Kim, supra, at 194 . Ruback confirmed these results in a second study extending over a three-year period. Ruback, supra, at 147-50. For additional discussion, see John Pound, Takeover Defeats Hurt Stockholders: A Reply to the Kidder Peabody Study, MIDLAND CORP. FIN. J., Summer 1986, at 33 (criticizing an investment banker's study that claimed to reach the opposite conclusion).
75. This general pattern is reported by two major studies. See Michael Bradley, Anand Desai & E. Han Kim, The Rationale Behind Interfirm Tender Offers: Information or Synergy?, 11 J. FIN. ECON. 183 (1983); Richard S. Ruback, Do Target Shareholders Lose in Unsuccessful Control Contests?, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES 137 (Alan J. Auerbach ed., 1988). Bradley, Desai, and Kim examined 26 targets of failed tender offers that were not subsequently acquired by a second offerer. They found that, over a two-year period, the shareholders of these targets lost all gains associated with their offers. Bradley, Desai & Kim, supra, at 194 . Ruback confirmed these results in a second study extending over a three-year period. Ruback, supra, at 147-50. For additional discussion, see John Pound, Takeover Defeats Hurt Stockholders: A Reply to the Kidder Peabody Study, MIDLAND CORP. FIN. J., Summer 1986, at 33 (criticizing an investment banker's study that claimed to reach the opposite conclusion).
76. This general pattern is reported by two major studies. See Michael Bradley, Anand Desai & E. Han Kim, The Rationale Behind Interfirm Tender Offers: Information or Synergy?, 11 J. FIN. ECON. 183 (1983); Richard S. Ruback, Do Target Shareholders Lose in Unsuccessful Control Contests?, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES 137 (Alan J. Auerbach ed., 1988). Bradley, Desai, and Kim examined 26 targets of failed tender offers that were not subsequently acquired by a second offerer. They found that, over a two-year period, the shareholders of these targets lost all gains associated with their offers. Bradley, Desai & Kim, supra, at 194 . Ruback confirmed these results in a second study extending over a three-year period. Ruback, supra, at 147-50. For additional discussion, see John Pound, Takeover Defeats Hurt Stockholders: A Reply to the Kidder Peabody Study, MIDLAND CORP. FIN. J., Summer 1986, at 33 (criticizing an investment banker's study that claimed to reach the opposite conclusion).
77. This general pattern is reported by two major studies. See Michael Bradley, Anand Desai & E. Han Kim, The Rationale Behind Interfirm Tender Offers: Information or Synergy?, 11 J. FIN. ECON. 183 (1983); Richard S. Ruback, Do Target Shareholders Lose in Unsuccessful Control Contests?, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES 137 (Alan J. Auerbach ed., 1988). Bradley, Desai, and Kim examined 26 targets of failed tender offers that were not subsequently acquired by a second offerer. They found that, over a two-year period, the shareholders of these targets lost all gains associated with their offers. Bradley, Desai & Kim, supra, at 194 . Ruback confirmed these results in a second study extending over a three-year period. Ruback, supra, at 147-50. For additional discussion, see John Pound, Takeover Defeats Hurt Stockholders: A Reply to the Kidder Peabody Study, MIDLAND CORP. FIN. J., Summer 1986, at 33 (criticizing an investment banker's study that claimed to reach the opposite conclusion).
78. This general pattern is reported by two major studies. See Michael Bradley, Anand Desai & E. Han Kim, The Rationale Behind Interfirm Tender Offers: Information or Synergy?, 11 J. FIN. ECON. 183 (1983); Richard S. Ruback, Do Target Shareholders Lose in Unsuccessful Control Contests?, in CORPORATE TAKEOVERS: CAUSES AND CONSEQUENCES 137 (Alan J. Auerbach ed., 1988). Bradley, Desai, and Kim examined 26 targets of failed tender offers that were not subsequently acquired by a second offerer. They found that, over a two-year period, the shareholders of these targets lost all gains associated with their offers. Bradley, Desai & Kim, supra, at 194 . Ruback confirmed these results in a second study extending over a three-year period. Ruback, supra, at 147-50. For additional discussion, see John Pound, Takeover Defeats Hurt Stockholders: A Reply to the Kidder Peabody Study, MIDLAND CORP. FIN. J., Summer 1986, at 33 (criticizing an investment banker's study that claimed to reach the opposite conclusion).
79. See, e.g., MARK L. SIROWER, THE SYNERGY TRAP: How COMPANIES LOSE THE ACQUISITION GAME (1997); Bernard S. Black, Bidder Overpayment in Takeovers, 41 STAN. L. REV. 597 (1989); Michael C. Jensen & Richard S. Ruback, The Market for Corporate Control: The Scientific Evidence, 11 J. FIN. ECON. 5 (1983).
80. See, e.g., MARK L. SIROWER, THE SYNERGY TRAP: How COMPANIES LOSE THE ACQUISITION GAME (1997); Bernard S. Black, Bidder Overpayment in Takeovers, 41 STAN. L. REV. 597 (1989); Michael C. Jensen & Richard S. Ruback, The Market for Corporate Control: The Scientific Evidence, 11 J. FIN. ECON. 5 (1983).
81. See, e.g., MARK L. SIROWER, THE SYNERGY TRAP: How COMPANIES LOSE THE ACQUISITION GAME (1997); Bernard S. Black, Bidder Overpayment in Takeovers, 41 STAN. L. REV. 597 (1989); Michael C. Jensen & Richard S. Ruback, The Market for Corporate Control: The Scientific Evidence, 11 J. FIN. ECON. 5 (1983).
82. On the one occasion where the Delaware Supreme Court cited evidence on the gains or losses to target shareholders from defeated takeover bids, it cited academically disreputable studies by investment bankers and lawyers and ignored the contrary academic studies. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 956 n.11 (Del. 1985).
83. See, e.g., ANDREI SHLEIFER, INEFFICIENT MARKETS: AN INTRODUCTION TO BEHAVIORAL FINANCE (2000); ROBERT J. SHILLER, IRRATIONAL EXUBERANCE (2000).
84. See, e.g., ANDREI SHLEIFER, INEFFICIENT MARKETS: AN INTRODUCTION TO BEHAVIORAL FINANCE (2000); ROBERT J. SHILLER, IRRATIONAL EXUBERANCE (2000).
85. On the returns to insiders, see, for example, Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 VA. L. REV. 549, 555-56 n.27 (1984) (collecting studies).
86. On takeover waves and their correspondence to stock market prices see, for example, GILSON & BLACK (1995), supra note 21, ch. 1; Bernard S. Black, The First International Merger Wave (and the Fifth and Last U.S. Wave), 54 U. MIAMI L. REV. 799 (2000).
87. On takeover waves and their correspondence to stock market prices see, for example, GILSON & BLACK (1995), supra note 21, ch. 1; Bernard S. Black, The First International Merger Wave (and the Fifth and Last U.S. Wave), 54 U. MIAMI L. REV. 799 (2000).
88. See, e.g., Black (1989), supra note 58; Reinier Kraakman, Taking Discounts Seriously: The Implications of "Discounted" Share Prices as an Acquisition Motive, 88 COLUM. L. REV. 891 (1988); Michael C. Jensen, The Takeover Controversy: Analysis and Evidence, in KNIGHTS, RAIDERS & TARGETS: THE IMPACT OF THE HOSTILE TAKEOVER 314 (John Coffee et al. eds., 1988).
89. See, e.g., Black (1989), supra note 58; Reinier Kraakman, Taking Discounts Seriously: The Implications of "Discounted" Share Prices as an Acquisition Motive, 88 COLUM. L. REV. 891 (1988); Michael C. Jensen, The Takeover Controversy: Analysis and Evidence, in KNIGHTS, RAIDERS & TARGETS: THE IMPACT OF THE HOSTILE TAKEOVER 314 (John Coffee et al. eds., 1988).
90. See, e.g., Black (1989), supra note 58; Reinier Kraakman, Taking Discounts Seriously: The Implications of "Discounted" Share Prices as an Acquisition Motive, 88 COLUM. L. REV. 891 (1988); Michael C. Jensen, The Takeover Controversy: Analysis and Evidence, in KNIGHTS, RAIDERS & TARGETS: THE IMPACT OF THE HOSTILE TAKEOVER 314 (John Coffee et al. eds., 1988).
91. For discussion of how courts might elicit truthful valuation information, see Gilson & Kraakman (1989), supra note 10, at 271-73.
92. For evidence on the concentration of takeover activity within particular industries, usually due to economic or regulatory shocks, see Gregor Andrade, Mark Mitchell & Erik Stafford, New Evidence and Perspectives on Mergers, 15 J. ECON. PERSPECTIVES 103 (Spring 2001).
93. 559A.2d 1261 (Del. 1989).
94. Id. at 1273.
95. Id. at 1270-73.
96. For skeptical accounts of the weight that investment banker fairness opinions deserve, see Lucian Arye Bebchuk & Marcel Kahan, Fairness Opinions: How Fair Are They and What Can Be Done About It?, 1989 DUKE L.J. 27; William J. Carney, Fairness Opinions: How Fair Are They and Why We Should Do Nothing About It, 70 WASH. U. L.Q. 523 (1992).
97. For skeptical accounts of the weight that investment banker fairness opinions deserve, see Lucian Arye Bebchuk & Marcel Kahan, Fairness Opinions: How Fair Are They and What Can Be Done About It?, 1989 DUKE L.J. 27; William J. Carney, Fairness Opinions: How Fair Are They and Why We Should Do Nothing About It, 70 WASH. U. L.Q. 523 (1992).
98. See Andrew Barry, Ron Strikes Again: Another Perelman Plan Leaves Shareholders Steaming, This Time at M&F Worldwide, BARRON'S, Apr. 2, 2001, at 22. Bernard Black was an expert witness for a plaintiff in a Delaware lawsuit claiming breach of fiduciary duty by the M&F Worldwide board of directors, which was settled.
99. See. e.g., AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 106-07 (Del. Ch. 1986) (considering facts where First Boston valued a management-led leveraged recapitalization at S43-47/share, but raised its estimate to $50-55/share after a hostile bidder offered $54); Bebchuk & Kahan (1989), supra note 69; Camey (1992), supra note 69, at 523-24 (collecting other horror stories).
100. See. e.g., AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 106-07 (Del. Ch. 1986) (considering facts where First Boston valued a management-led leveraged recapitalization at S43-47/share, but raised its estimate to $50-55/share after a hostile bidder offered $54); Bebchuk & Kahan (1989), supra note 69; Camey (1992), supra note 69, at 523-24 (collecting other horror stories).
101. See. e.g., AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 106-07 (Del. Ch. 1986) (considering facts where First Boston valued a management-led leveraged recapitalization at S43-47/share, but raised its estimate to $50-55/share after a hostile bidder offered $54); Bebchuk & Kahan (1989), supra note 69; Camey (1992), supra note 69, at 523-24 (collecting other horror stories).
102. See European Union, Proposal for a 13th European Parliament and Council Directive on Company Law Concerning Takeover Bids, Doc. No. 595PC0655 (1996); Pull up the Drawbridge, ECONOMIST, July 7, 2001 (reporting 273-273 split vote on the 13th directive). For the revival of this approach, see REPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON ISSUES RELATED TO TAKEOVER BIDS (Jan. 10, 2002), at http://europa.eu.int/comm/internal_market/en/company/company/ news/hlg01-2002.pdf.
103. See European Union, Proposal for a 13th European Parliament and Council Directive on Company Law Concerning Takeover Bids, Doc. No. 595PC0655 (1996); Pull up the Drawbridge, ECONOMIST, July 7, 2001 (reporting 273-273 split vote on the 13th directive). For the revival of this approach, see REPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON ISSUES RELATED TO TAKEOVER BIDS (Jan. 10, 2002), at http://europa.eu.int/comm/internal_market/en/company/company/ news/hlg01-2002.pdf.
104. See European Union, Proposal for a 13th European Parliament and Council Directive on Company Law Concerning Takeover Bids, Doc. No. 595PC0655 (1996); Pull up the Drawbridge, ECONOMIST, July 7, 2001 (reporting 273-273 split vote on the 13th directive). For the revival of this approach, see REPORT OF THE HIGH LEVEL GROUP OF COMPANY LAW EXPERTS ON ISSUES RELATED TO TAKEOVER BIDS (Jan. 10, 2002), at http://europa.eu.int/comm/internal_market/en/company/company/ news/hlg01-2002.pdf.
105. Strine (2001), supra note 32, at 925.
106. See Gilson (2001), supra note 27. For an effort to persuade the courts to take seriously the regulatory approach that Unocal seemed to promise, see Gilson & Kraakman (1989), supra note 10.
107. DEL. CODE ANN. tit. 8 § 141 (a) (1991); see, e.g., Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998).
108. We had the opportunity to draft a corporate law statute for the Russian Federation substantially from scratch, and followed this strategy. See Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911, 1960-63 (1996).
109. For a survey, see John C. Coates IV, Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence, 79 TEX. L. REV. 271 (2000). For recent evidence that staggered boards likely reduce shareholder welfare, see Robert Daines, Do Classified Boards Affect Firm Value? Takeover Defenses After the Poison Pill, J. FIN. & QUANT. ANALYSIS (forthcoming 2002).
110. For a survey, see John C. Coates IV, Takeover Defenses in the Shadow of
111. See 21 Del. Laws ch. 273, § 135 (1899). For our own view that shareholders should be able to unilaterally amend the charter, see Black & Kraakman (1996), supra note 76, at 1943-45.
112. As we noted earlier, Marcel Kahan has advocated a similar position, based on a different reading of the Delaware takeover cases. See Kahan (1994), supra note 12.
113. Compare Ronald J. Gilson & Alan Schwartz, Sales and Elections as Methods for Transferring Corporate Control, 2 THEORETICAL INQUIRIES IN LAW 783 (2001), with Lucian Arye Bebchuk & Oliver Hart, Takeover Bids v. Proxy Fights in Contests for Corporate Control (Oct. 2001) (Harvard L. & Econ. Discussion Paper No. 336), available at http://papers.ssrn.com/ abstract=290584.
114. Compare Ronald J. Gilson & Alan Schwartz, Sales and Elections as Methods for Transferring Corporate Control, 2 THEORETICAL INQUIRIES IN LAW 783 (2001), with Lucian Arye Bebchuk & Oliver Hart, Takeover Bids v. Proxy Fights in Contests for Corporate Control (Oct. 2001) (Harvard L. & Econ. Discussion Paper No. 336), available at http://papers.ssrn.com/ abstract=290584.
115. 2 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS §§ 253 (mergers), 271 (sales of all or substantially all assets) (3d ed. 1998).
116. DEL. CODE ANN. tit. 8 § 251 (1991) (mergers), §271 (sales of substantially all assets).
117. For approval of this defense by the Delaware District Court, see Moore Corp. v. Wallace Computer Services, 907 F. Supp. 1545 (D. Del. 1995). No Delaware state court decision directly blesses keeping a poison pill in place after losing an election. However, many practitioners believe that target companies may do so, and there are occasional cases where target boards have done so. For evidence on the antitakeover potency of a poison pill plus a staggered board, see Lucian Arye Bebchuk, John C. Coates IV & Guhan Subramanian, The Antitakeover Power of Classified Boards: Theory, Evidence, and Policy, 54 STAN. L. REV. (forthcoming 2002).
118. For approval of this defense by the Delaware District Court, see Moore Corp. v. Wallace Computer Services, 907 F. Supp. 1545 (D. Del. 1995). No Delaware state court decision directly blesses keeping a poison pill in place after losing an election. However, many practitioners believe that target companies may do so, and there are occasional cases where target boards have done so. For evidence on the antitakeover potency of a poison pill plus a staggered board, see Lucian Arye Bebchuk, John C. Coates IV & Guhan Subramanian, The Antitakeover Power of Classified Boards: Theory, Evidence, and Policy, 54 STAN. L. REV. (forthcoming 2002).
119. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1387-88 (Del. 1995).
120. See, e.g., Lucian Arye Bebchuk, The Undistorted Shareholder Choice Approach to Corporate Takeovers, 69 U. CHI. L. REV. (forthcoming 2002); Jeffrey N. Gordon, "Just Say Never?" Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511 (1997). But see Martin Lipton, Pills, Polls and Professors Redux, 69 V. CHI. L. REV. (forthcoming 2002) (agreeing that boards should not be able to just say never, but arguing that no change in Delaware case law is needed because "the incidence of a target's actually saying 'never' is so rare as not to be a real-world problem").
121. See, e.g., Lucian Arye Bebchuk, The Undistorted Shareholder Choice Approach to Corporate Takeovers, 69 U. CHI. L. REV. (forthcoming 2002); Jeffrey N. Gordon, "Just Say Never?" Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511 (1997). But see Martin Lipton, Pills, Polls and Professors Redux, 69 V. CHI. L. REV. (forthcoming 2002) (agreeing that boards should not be able to just say never, but arguing that no change in Delaware case law is needed because "the incidence of a target's actually saying 'never' is so rare as not to be a real-world problem").
122. See, e.g., Lucian Arye Bebchuk, The Undistorted Shareholder Choice Approach to Corporate Takeovers, 69 U. CHI. L. REV. (forthcoming 2002); Jeffrey N. Gordon, "Just Say Never?" Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511 (1997). But see Martin Lipton, Pills, Polls and Professors Redux, 69 V. CHI. L. REV. (forthcoming 2002) (agreeing that boards should not be able to just say never, but arguing that no change in Delaware case law is needed because "the incidence of a target's actually saying 'never' is so rare as not to be a real-world problem").
123. On when and how today's public companies adopted staggered boards, see Bebchuk, Coates & Subramanian (2002), supra note 83; John C. Coates IV, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 CAL. L. REV. 1301 (2001); Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitakeover Provisions in IPOs, 17 J.L. ECON. & ORG. 83 (2001).
124. On when and how today's public companies adopted staggered boards, see Bebchuk, Coates & Subramanian (2002), supra note 83; John C. Coates IV, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 CAL. L. REV. 1301 (2001); Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitakeover Provisions in IPOs, 17 J.L. ECON. & ORG. 83 (2001).
125. On when and how today's public companies adopted staggered boards, see Bebchuk, Coates & Subramanian (2002), supra note 83; John C. Coates IV, Explaining Variation in Takeover Defenses: Blame the Lawyers, 89 CAL. L. REV. 1301 (2001); Robert Daines & Michael Klausner, Do IPO Charters Maximize Firm Value? Antitakeover Provisions in IPOs, 17 J.L. ECON. & ORG. 83 (2001).
126. See, e.g., Gilson (2001), supra note 28; Gordon (1997), supra note 21. 88 See In re Santa Fe Pacific Corp. S'holder Litig., 669 A.2d 59 (Del. 1995).
127. See id. at 68 ("In voting to approve the Santa Fe-Burlington merger, the Santa Fe stockholders were not asked to ratify the board's unilateral decision to erect defensive measures against the Union Pacific offer. The stockholders were merely offered the choice between the Burlington Merger and doing nothing.").
128. The principal cases are Paramount v. QVC, 637 A.2d 34 (Del. 1993), which rejected a bust-up fee and lock-up option that conveyed about 7% of the transaction's value to the first bidder, and Brazen v. Bell Atlantic Corp., 695 A.2d 43 (Del. 1997), which upheld a $550 million bust-up fee, which was only 2% of transaction value.
129. 564 A.2d 651, 661 (Del. Ch. 1988) (board actions taken for "the primary purpose of impeding the exercise of stockholder voting power" must have a "compelling justification"). Blasius is a chancery court opinion, but the Delaware Supreme Court has "accepted [its] basic legal tenets." Stroud v. Grace, 606 A.2d 75, 91 (Del. 1992).
130. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1388-89 (Del. 1995).
131. 199 A.2d 548 (Del. 1964).
132. See Gilson (2002), supra note 21 (arguing that the cognitive biases that could explain market inefficiency also predict board error).