1 Mergers Expected to Stay Plentiful in 1983 But Will Be Less Exciting, Wall St. J., Jan. 3, 1983, at 5, col. 1.Google Scholar

2 See infra part II.A.Google Scholar

3 Bebchuk, Lucian A., The Case for Facilitating Tender Offers, 95 Harv. L. Rev. 1028 (1982) [hereinafter cited as “Competing Offers”]; id., The Case for Facilitating Competing Tender Offers: A Reply and Extension, 35 Stan. L. Rev. 23 (1982) [hereinafter cited as Reply]; and Lowenstein, Louis, Pruning Dead-wood in Hostile Takeovers: A Proposal for Legislation, 83 Colum. L. Rev. 249 (1983). For a contrary view, see Easterbrook, Frank H. & Fischel, Daniel R., Auctions and Sunk Costs in Tender Offers, 35 Stan. L. Rev. (1982).Google Scholar

4 The SEC Advisory Committee on Tender Offers has proposed a “threshold point” of 20% for share ownership. Anyone holding an interest that is beyond this point would be required to make an offer for 100% of the target. SEC Advisory Committee on Tender Offers, Report of Recommendations, Recommendation 14, at 23, Special Report No. 1028, Fed. Sec. L. Rep. (CCH) (July 8, 1983). A noted participant in corporate acquisitions has recently criticized this suggestion. Carl C. Icahn, A Statement to American Management: Stop the Oppression of Shareholders, N.Y. Times, May 22, 1983, § 3, at 2. See also the dissent of Easterbrook & Jarrell to the SEC Advisory Committee's Report, supra at 91–96.Google Scholar

5 See, e.g., Brudney, Victor, & Chirelstein, Marvin, Fair Shares in Corporate Mergers and Takeovers, 88 Harv. L. Rev. 297 (1974).Google Scholar

6 Supra note 3.Google Scholar

7 Infra part IV.Google Scholar

8 Infra part IV.C.3.Google Scholar

9 Infra part V.Google Scholar

10 Easterbrook, Frank H. & Fischel, Daniel R., Corporate Control Transactions, 91 Yale L.J. 698 (1982).Google Scholar

11 Easterbrook & Fischel's formulation of the rule “that those who produce a gain should be allowed to keep it, subject to the constraint that other parties to the transaction be at least as well off as before the transaction,”id. at 698, is only moderately different from the difference principle of Rawls, “that unless there is a distribution that makes both persons better off …, an equal distribution is to be preferred. “John Rawls, A Theory of Justice 76 (Cambridge: Harvard University Press, Belknap Press, 1971). While their rule might appear to be no more than a test of Pareto superiority, infra note 15, these authors argue that permitting the capture of control premiums is justified because it makes all shareholders better off, an argument which is much closer to Rawls's formulation. Easterbrook & Fischel, supra note 10, at 700, 708–11. The use of “constitutional” rules in corporate law is hardly exceptional. See, e.g., Melvin A. Eisenberg, The Structure of the Corporation: A Legal Analysis 1 (Boston: Little, Brown & Co., 1976). Implicit in this article is my own view: that fiduciary rules are appropriately adopted only where elements of systematic market failure tend to otherwise frustrate welfare-increasing transactions.Google Scholar

12 Easterbrook & Fischel, supra note 10, at 726, citing Carney, William J., Fundamental Corporate Changes, Minority Shareholders, and Business Purposes, 1980 A.B.F. Res. J. 69. These authors were correct in stating that I suggested the possibility of inefficient transfers of control. This article demonstrates contractual responses to both efficiency and sharing issues, which are related.Google Scholar

13 Easterbrook & Fischel, supra note 10, implicitly accept the need for some fiduciary rules in takeouts. They do not indicate what elements of market failure might make external imposition of rules preferable to leaving parties with the benefits and costs of their bargains. They describe the fiduciary principle as a standard form penalty clause with elastic contours that “reflect the difficulty that contracting parties have in anticipating when and how their interests may diverge.”Id. at 702. While contracting parties may have difficulties anticipating innovations in takeovers, once such innovations have been observed, market participants can recognize and contract in response, as this article indicates.Google Scholar

14 This article does not address the issue of one-step takeouts where an existing dominant shareholder engages in a takeout merger. I believe that is a separate issue involving a different analysis.Google Scholar

15 Of course, the concept of a wealth-producing transaction is a criterion central to economic analysis of legal principles and rules. A transaction is wealth producing when the sum of the outcomes for all participants in the transaction is greater than the pretransaction sum. Transactions that enhance wealth are generally said to be “efficient” transactions. Wealth-transferring transactions, on the other hand, only involve redistribution of existing wealth or property, without any increase in the amount of wealth. Efficiency may be defined by different criteria. A resource allocation is Pareto optimal when no movement from it is possible that would make anyone better off without leaving another worse off. Cf. Coleman, Jules L., Efficiency, Utility, and Wealth Maximization, 8 Hofstra L. Rev. 509, 512–13 (1980). An allocation is Pareto superior to another if no one is made worse off by it and if at least one person's welfare is improved. Id. at 513. Kaldor-Hicks efficiency, on the other hand, involves trade offs. A resource allocation is Kaldor-Hicks efficient with respect to another if, and only if, welfare gains on tendered shares are not exceeded by welfare losses to shareholders on those shares subsequently taken by merger.Google Scholar

16 The phrase “market for corporate control” was coined by Henry G. Manne in Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).Google Scholar

17 The literature detailing the developing legal rules governing the market for corporate control is immense. See, e.g., Edward Ross Aranow & Herbert A. Einhorn, Tender Offers for Corporate Control: A Treatise on the Legal and Practical Problems of the Offeror, the Offeree, and the Management of the Target Company in Cash Tenders and Exchange Offers (New York: Columbia University Press, 1973); Edward R. Aranow, Herbert A. Einhorn, & George Berlstein, Developments in Tender Offers for Corporate Control (New York: Columbia University Press, 1977); Arthur Fleischer, Tender Offers: Defenses, Responses and Planning (New York: Law & Business, Inc. Harcourt Brace Jovanovich, 1979); and Martin Lipton & Erica H. Steinberger, Takeovers and Freezeouts (2 vols. New York: Law Journal Seminars-Press, 1978).Google Scholar

18 See infra note 37.Google Scholar

19 A takeout merger is one in which a dominant shareholder votes its shares in favor of a merger in which the minority shareholders of the firm will not receive an equity interest in the surviving firm. I have borrowed this term from Weiss, Elliot J., The Law of Take Out Mergers: A Historical Perspective, 56 N.Y.U.L. Rev. 624 (1981), because it lacks the pejorative connotations of the more common term, “freeze out.” The literature on takeouts is massive. See, e.g., Borden, Arthur M., Going Private—Old Tort, New Tort or No Tort?, 49 N.Y.U. L. Rev. 987 (1974); Brudney & Chirelstein, supra note 5; id., A Restatement of Corporate Freezeouts, 87 Yale L.J. 1354 (1978); Brudney, Victor, A Note on “Going Private,” 61 Va. L. Rev. 1019 (1975); and id., Efficient Markets and Fair Values in Parent Subsidiary Mergers, 4 J. Corp. L. 63 (1978); Carney, supra note 12; Greene, Edward F., Corporate Freeze-Out Mergers: A Proposed Analysis, 28 Stan. L. Rev. 487 (1976); Lorne, Simon M., A Reappraisal of Fair Shares in Controlled Mergers, 126 U. Pa. L. Rev. 955 (1978); Toms, Bate C. III, Compensating Shareholders Frozen Out in Two-Step Mergers, 78 Colum. L. Rev. 548 (1978), and Weiss, supra.Google Scholar

20 Where the successful bidder owns 90% or more of the shares of the target firm, in many jurisdictions the takeout merger may simply be accomplished by a short-form merger, approved only by the parent company directors. See, e.g., Model Business Corp. Act § 75 (1979); Del. Code Ann. tit. 8, § 253 (1974 & Cum. Supp. 1982). Where management of the bidder also controls the board of the target, it is easy to see how the takeout can be viewed as an act of management rather than of a shareholder, as I suggest infra text at notes 79–86.Google Scholar

21 See infra note 37.Google Scholar

22 Delaware abandoned the “business purpose” test in Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983). I have previously criticized this test as irrelevant to shareholder welfare. Carney, supra note 12.Google Scholar

23 See infra text at notes 80–93.Google Scholar

24 Easterbrook & Fischel, supra note 10, at 700–705, first discuss the fiduciary principle as an agency principle and then proceed without further analysis to discuss its application in a situation involving a conflict among investor interests (the sale of a control block of shares) and thus beg the question whether fiduciary principles should be (or are) applicable under the circumstances here. In Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), the Delaware Supreme Court has partially retreated from its previous expansive application of fiduciary duties to majority shareholdes.Google Scholar

25 For a general discussion of the use of rules to solve coordination problems, see Heymann, Philip B., The Problem of Coordination: Bargaining and Rules, 86 Harv. L. Rev. 797 (1973).Google Scholar

26 While the term “shark repellent” amendment is generally used to describe any charter amendment that makes a takeover more difficult, I will use the term in a more limited sense. Here it describes those changes in corporate charters that require (1) votes higher than the minimum specified in general corporate statutes (“supermajority votes”), (2) a higher vote in order to amend such provisions once adopted (“lockup amendments”), (3) approval by the holders of some percentage of the shares not taken in the tender offer (independent shareholder ratification amendments), and (4) imposition of some restrictions on the consideration that can be given to minority shareholders in a merger controlled by a dominant shareholder that has previously obtained control by a tender offer (“fair price amendments”). The critical literature here is becoming massive, although it has developed somewhat later than that on takeout mergers. See, e.g., Black, Lewis S. Jr., & Smith, Craig B., Antitakeover Charter Provisions: Defending Self-Help for Takeover Targets, 36 Wash. & Lee L. Rev. 699 (1979); Cary, William, Corporate Devices Used to Insulate Management from Attack, 25 Bus. Law. 839 (1970); Cohn, Stuart R., Tender Offers and the Sale of Control: An Analogue to Determine the Validity of Target Management Defensive Measures, 66 Iowa L. Rev. 475 (1981); Easterbrook, Frank H. & Fischel, Daniel R., The Proper Role of A Target's Management in Responding to a Tender Offer, 94 Harv. L. Rev. 1161 (1981) [hereinafter cited as Management's Role]; id., Bids, Takeover, Defensive Tactics and Shareholders' Welfare, 36 Bus. Law. 1733 (1981); Fischel, Daniel R., Efficient Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash Tender Offers, 57 Tex. L. Rev. 1 (1978); Friedenberg, Ellen S., Jaws III: The Impropriety of Shark-Repellent Amendments as a Takeover Defense, 7 Del. J. Corp. L. 32 (1982); Gilson, Ronald J., The Case Against Shark Repellent Amendments: Structural Limitations on the Enabling Concept, 34 Stan. L. Rev. 775 (1982); Hochman, Stephen A. & Folger, Oscar D., Defecting Takeovers: Charter and By-Law Techniques, 34 Bus. Law. 537 (1979); Mullaney, Joseph E., Guarding Against Takeovers—Defensive Charter Provisions, 25 Bus. Law. 1441 (1970); Rose, Ira B. & Collins, Richard S., Porcupine Proposals, 12 Rev. Sec. Reg. 977 (1979); Schmults, Edward C. & Kelly, Edmund J., Cash Take-over Bids—Defense Tactics, 23 Bus. Law. 115 (1967); Smith, Craig B., Fair Price and Redemption Rights: New Dimensions in Defense Charter Provisions, 4 Del. J. Corp. L. 1 (1978); Richard R. West, Corporate Governance and the Market for Corporate Control, in Henry G. Manne, ed., Corporate Governance: Past and Future 46, 59–60 (New York: K.C.G. Productions, Inc., 1982); and Yoran, Aaron (Jurkevitz), Advance Defensive Tactics Against Takeover Bids, 21 Am. J. Comp. L. 531 (1973).Google Scholar

27 Easterbrook & Fischel, supra note 10, at 698.Google Scholar

28 The minimum conditions for efficient securities markets require only “that information be available to a ‘sufficient’ number of investors, that transaction costs be ‘reasonable,’ and that, in the absence of agreement about the implications of current information and expectations regarding price movements, there be no evidence of consistent superiority or inferiority by significant participants in the markets.” James H. Lorie & Mary T. Hamilton, The Stock Market: Theories and Evidence 80 (Homewood, Ill.: Richard D. Irwin, 1973). See also Richard A. Posner, Economic Analysis of Law, 219–20 (§ 10.3) (2d ed. Boston: Little, Brown & Co., 1977); Homer S. Kripke, The SEC and Corporate Disclosure: Regulation in Search of a Purpose 83–88 (New York: Harcourt Brace Jovanovich, 1979); Fama, Eugene F., Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. Fin. 383 (1970); and John Lintner, Jr., A Model of a Perfectly Functioning Securities Market, in Henry G. Manne, ed., Economic Policy and the Regulation of Corporate Securities 143–66 (Washington, D.C.: American Enterprise Institute for Policy Research, 1969). These markets are efficient in control transactions when relative share prices signal potential bidders about opportunities for gains through takeovers, whether those gains are derived from increased efficiency of operations or exploitation of lack of shareholder coordination.Google Scholar

29 See infra part V.Google Scholar

30 Id.Google Scholar

31 Twenty years ago, hostile tender offers were virtually unheard of. Aranow & Einhorn, supra note 17, at v. Transfers of control took place occasionally by proxy fights but more commonly by mergers negotiated by management. Manne, Henry G., Some Theoretical Aspects of Share Voting: An Essay in Honor of Adolf A. Berle, 64 Colum. L. Rev. 1427 (1964); id., supra note 16; Aranow & Einhorn, supra note 17, at v.Google Scholar

32 “Warehousing” is “the practice of parking the target's shares with third parties” in advance of a tender offer in order to avoid disclosure of the identity of a bidder. Aranow & Einhorn, supra note 17, at 25. The authors also note that the Williams Act, Act of July 29, 1968, Pub. L. No. 90–439, 82 Stat. 455, which added §§ 13(d) and 13(e) and 14(d)-(f) to the Securities Exchange Act of 1934,15 U.S.C. §§ 78m(d), (e), and 78n(d)-(f) (1976), required § 13(d) filings by such “groups,” according to GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert, denied, 406 U.S. 910 (1972), and in all likelihood would discourage warehousing. Aranow & Einhorn, supra note 17 at n.47. See also Joseph H. Flom, Warehousing, in Robert H. Mundheim, Arthur Fleischer, Jr., & Donald W. Glazer, eds., First Annual Institute on Securities Regulation 79 (New York: Practising Law Institute, 1970); Herbert S. Wander, Takeovers: Preparing the Attack, in Robert H. Mundheim & Arthur Fleischer, Jr., eds., Second Annual Institute on Securities Regulation 237, 241 (New York: Practising Law Institute, 1971); Thomas, Eliot B., Warehousing, 3 Rev. Sec. Reg. 975 (1970).Google Scholar

33 New information about the value of the firm is conveyed by the tender offer itself, which will lead to an upward shift in the supply curve. See Bradley, Michael, Interfirm Tender Offers and the Market for Corporate Control, 53 J. Bus. 345 (1980). But see Bradley, Michael, Desai, Anand, & Kim, E. Han, The Rationale Behind Interfirm Tender Offers, 11 J. Fin. Econ. 183 (1983). New information can also shift demand curves. See Scholes, Myron S., The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices, 45 J. Bus. 179 (1972).Google Scholar

34 Securities Exchange Act of 1934, § 14(d)(6), 15 U.S.C. § 78n(d)(6) (1976).Google Scholar

35 The SEC has recently extended the proration period for the full minimum period that a tender offer must be held open, which is 20 days under rule 14e-1(a), 17 C.F.R. 240.14e-1(a) (1982). The statutory pro-ration period of ten days in § 14(d)(6) has been extended for the full tender offer period by rule 14d-8 (1982). SEC Exchange Act Release No. 34–19336, Fed. Sec. L. Rep. (CCH) 183,306 (Dec. 15, 1982). The effect of the rule is to prohibit two-tier tender offers where the cash price declines after expiration of the mandatory proration period.Google Scholar

36 The SEC stated: “While the decision to tender appears to be a voluntary act by the individual investor, there are pressures to accept the offer because if enough security-holders tender their shares, non-tendering security-holders may find that whatever liquidity existed in the trading market for the issuer's securities has been severely undermined or has disappeared entirely. Moreover, nontendering security holders may lose protections of the Exchange Act if the issuer becomes eligible for and seeks termination of registration under Section 12 or if the duty of the issuer to file periodic reports under Section 15(d) is suspended.” SEC Exchange Act Release No. 14185, [1977-78 Decisions] Fed. Sec. L. Rep. (CCH) 181,366, at 88,737, n.12 (Nov. 17, 1977). Warnings to this effect in tender offer materials would be appropriate, if not required, in many cases. See also Halle & Stieglitz v. Empress International, Inc., [1977-78 Decisions] Fed. Sec. L. Rep. (CCH) 196,249 (D. Del. 1977) and A. A. Sommer, Jr., “Going Private”: A Lesson in Corporate Responsibility, [1974-75 Decisions] Fed. Sec. L. Rep. (CCH) 180,010, at 84,696 (1974). There is a temptation to err on the side of gloom in these disclosures, as the SEC has charged on at least one occasion. SEC v. Westinghouse Elec. Corp., [1975-76 Decisions] Fed. Sec. L. Rep. (CCH) 195,262 (S.D.N.Y. 1975) (SEC Complaint).Google Scholar

37 The earliest such takeout in Delaware appears to be Sterling v. Mayflower Hotel Corp., 33 Del. Ch. 293, 93 A.2d 107 (Sup. Ct. 1952). See also David J. Greene & Co. v. Schenley Indus., 281 A.2d 30 (Del. Ch. 1971); Kemp v. Angel, 381 A.2d 241 (Del. Ch., 1977); Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977); Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983); and Young v. Valhi, 382 A.2d 1372 (Del. Ch. 1978); Cf. Coyne v. Park & Tilford Distillers Corp., 38 Del. Ch. 514,154 A.2d 893 (Sup. Ct. 1959); David J. Greene & Co. v. Dunhill Int'l, 249 A.2d 427 (Del. Ch. 1968); Santa Fe Indus, v. Green, 430 U.S. 462 (1977); Stauffer v. Standard Brands, 187 A.2d 78 (Del. 1962); and Tanzer v. Int'l Gen. Indus., 379 A.2d 1121 (Del. 1977). Shareholders in other jurisdictions faced similar prospects. See, e.g., Merrit v. Libby, McNeill & Libby, 533 F.2d 1310 (2d Cir. 1976); and Schulwolf v. Cerro Corp., 86 Misc. 2d 292, 380 N.Y.S.2d 957 (Sup. Ct. 1976).Google Scholar

38 This was essentially the charge in Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir. 1974), and in Greenstein v. Paul, 400 F.2d 580 (2d Cir. 1968). In Southdown, Inc. v. McGinnis, 510 P.2d 636, 640 (Nev. 1973), the controlling shareholder pointed to its discontinuation of dividends by the controlled firm as evidence that the subsidiary's shares had declined in value. The court disagreed, noting that ability to pay was more important than actual payment. See also Berkowitz v. Power/Mate Corp., 342 A.2d 566 (N. J. Super. Ct. Ch. Div. 1975), a one-step “going private” transaction, where similar charges of manipulation through high salaries were made. Easterbrook & Fischel, supra note 10, at 732, recognize the possibility of a market price depressed by a parent firm's manipulations, but indicate that investors should be happy to escape this predicament at any price above the previous market price. Charter amendments may be a device that can render such manipulations ineffective in determining the price of a takeout merger. Absent manipulation and absent the type of dilemma described herein, investors may find little to complain about in a takeout at or above the market price, since they can replace one set of financial assets with another bearing a comparable risk-return ratio.Google Scholar

39 Brudney & Chirelstein, supra note 5. One study indicates that takeout mergers have been employed in connection with 72% of successful tender offers within five years after the tender offer. Dodd, Peter, & Ruback, Richard, Tender Offers and Stockholder Returns: An Empirical Analysis, 5 J. Fin. Econ. 351, n.2 (1977). The “prisoner's dilemma” is the classic example of a situation where an inability to coordinate decisions leads to less than optimal results. A and B are two prisoners who were caught for a crime. The district attorney “interviews” each separately and proposes the following: “I have enough evidence to send both of you to jail for one year. But if you alone confess to the crime, I'll give you three months in jail and your partner ten years. I am offering him the same deal. If you both confess, you'll each get 5 years.” What should should A and B do? They have no opportunity to communicate with each other. A game theory matrix presents their alternatives:Google Scholar

The solution will be confessions by both A and B. A confession by A could result in either a three-month or five-year sentence. No confession could lead to a one-year or a ten-year sentence. Since A cannot count on B to take the position most favorable to him (no confession), he must protect himself by confessing. The same is true of B. The decision to protect self-interest, then, along with the inability to coordinate decisions, leads to less than optimal results. Paul Samuelson, Economics 504–5 (9th ed. New York: McGraw-Hill Book Co., 1973).Google Scholar

40 See supra note 15. Note that I refer to a “group result” in the text, since I intend to exclude from this analysis the welfare of the bidding corporation. We can assume that its welfare will be enhanced by any bid that it voluntarily chooses to make.Google Scholar

41 Easterbrook & Fischel, supra note 10, at 727. The authors do not explain what risk is involved in selling out at a price above the previous market price. Their analysis misses the point that the form of prisoner's dilemma suggested by Brudney and Chirelstein and described more fully supra note 39 forces all shareholders to tender in order to protect themselves from receiving only the lower takeout price. In such cases, there are no particular shareholders who can be identified as assuming a risk not borne by others.Google Scholar

42 Expected value is defined infra note 76.Google Scholar

43 A general glossary of the terms used in takeovers can be found in Gilson, supra note 26, at 775–76 nn .2,3. A “low ball” offer is generally one that is designed to achieve a bargain purchase by the bidder, in part because of the lack of coordination of shareholders and the inability of target management to locate a “white knight” bidder willing to bid up the price to a competitive level. Cf. Polinsky v. MCA Inc., 680 F.2d 1286, 1290 (9th Cir. 1982). I do not suggest that such offers necessarily involve a “raid” on the assets at the target corporation.Google Scholar

44 One study indicates that where tender offers were unsuccessful and were not followed by other successful tender offers, the market value of the target's shares was increased by 22% as a result of the tender offer. Bradley, supra note 33, at 374. Bradley suggests that the tender offer reveals new information to the market about the value of the target's resources that may be exploited in some cases by target management. Id. at 347. This may be another way of stating that the weak version of the efficient market hypothesis is the explanation most consistent with this evidence. The various versions of the efficient market hypothesis are described by Lorie & Hamilton, supra note 28, at 71:. The weak form asserts that current prices fully reflect the information implied by the historical sequence of prices. In other words, an investor cannot enhance his ability to select stocks by knowing the history of successive prices and the results of analyzing them in all possible ways. The semistrong form of the hypothesis asserts that current prices fully reflect public knowledge about the underlying companies, and that efforts to acquire and analyze this knowledge cannot be expected to produce superior investment results. For example, one cannot expect to earn superior rates of return by reacting to annual reports, announcements of changes in dividends, or stock splits. The strong form asserts that not even those with privileged information can often make use of it to secure superior investment results. A later study limits Bradley's results to those cases where a subsequent bid is made for the target. Bradley et al., supra note 33.Google Scholar

45 In a competitive tender offer battle with Mobil Oil, United States Steel successfully obtained control of Marathon Oil in late 1981 with a cash tender offer at $125 per share for 51% of Marathon's stock followed by a post-tender merger at approximately $86. Radol v. Thomas, 534 F. Supp. 1302, 1305 n.2 (S.D. Ohio 1982). See also Martin Marietta Corporation's bid for Bendix Corporation, infra note 50. Newly adopted Rule 14d-8 will prevent bidders from tendering on a two-price basis but will not prevent second-step takeouts by merger. See supra note 33.Google Scholar

46 In game theory this strategy is called his “minimax” position or the best of the worst positions that he may find himself in. Cf. Peter H. Aranson, American Government: Strategy and Choice 54 (Cambridge, Mass.: Winthrop Publishers, 1981); and William H. Riker & Peter C. Ordeshook, An Introduction to Positive Political Theory 210–11 (Englewood Cliffs, N.J.: Prentice-Hall, 1973).Google Scholar

47 This problem represents the prisoner's dilemma and can be illustrated in the following matrix:Google Scholar

Note that the minimax strategy for each player dictates choosing to tender, where a better solution would be for both not to tender. Gilson, Ronald J., in A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819, 860 (1981), argues that target shareholders are not placed in a true prisoner's dilemma because the gain from the premium offered is not less than the anticipated loss on shares retained after the offer's success. But see Jensen, Michael C. & Ruback, Richard S., The Market for Corporate Control: The Scientific Evidence 11 J. Fin. Econ. 5 (1983) See also Bebchuk, Competing Offers, supra note 3, at 1040 n.59. It seems Gilson's example is based on a calculation of the expected value of each strategy, while game theory and the minimax strategy is based on avoidance of the greatest harm without comparing the expected value of alternative strategies. Game theory also ignores the impact of differing variances in results. See, e.g., Victor Brudney & Marvin Chirelstein, Corporate Finance: Cases and Materials 59–70 (2d ed. Mineola, N.Y.: Foundation Press, 1979). Gilson mistakenly argues that the gain from the premium offered is rarely less than the anticipated loss on shares retained after the offer's success (and is thus efficient for target shareholders in the Pareto superior sense), because the price paid the minority in the takeout transaction is no lower and is sometimes higher than the original tender offer. He mentions as the only case of this type, as of 1981, the unsuccessful contested tender offer of McDermott, Inc., for Pullman, Inc. Gilson, supra, at 861 n.149. At least two cases report examples of this kind, In re Olivetti Underwood Corp., 246 A.2d 800 (Del. Ch. 1968), and Gibbons v. Schenley Indus., 339 A.2d 460 (Del. Ch. 1975). One study indicates that a substantial number of target firms experience post-tender offer execution market prices below the prebid prices, thus creating opportunities for takeouts based on market values that leave nontendering target shareholders worse off than before. Jarrell, Gregg A. & Bradley, Michael, The Economic Effects of Federal and State Regulations of Cash Tender Offers, 23 J. L. & Econ. 371, 394 fig. II (1980). It is generally true that postexecution prices for target firm shares fall below the tender offer price. Bradley, supra note 33. The frequency of such strategies may be increasing. The SEC noted the increased use of such offers in SEC Exchange Act Release No. 18761, [1982 Decisions] Fed. Sec. L. Rep. (CCH) 183,222, text at n.6. See also SEC May Curb “Two-Tier” Bids for Takeovers, Wall St. J., May 14, 1982, at 4, col. 1. The strategy behind two-step offers and their development is also described in Artful Advisor: How First Boston Corp. Turned Itself Around Amid a Merger Mania, Wall St. J., April 21, 1982, at 1, col. 6. A recent example involved the offer of Pabst Brewing Company for 49% of Olympia Brewing Company stock at $28 cash, with a plan to follow the offer with a merger giving Olympia holders securities valued at about $22 per share. Pabst to Begin Bid for Olympia at $28 a Share, Wall St. J., June 2,1982, at 4, col. 1. See also U.S. Steel's Offer for Marathon Oil, supra note 45, and DuPont's bid of $98 cash per share for 45% of Conoco's common stock and a stock package valued at $65 for the remainder, whether tendered or not. DuPont Completes Takeover of Conoco: Boards Are Realigned, Wall St. J., Oct. 1, 1981, at 20, col. 4. Not all tender offers will pose the prisoner's dilemma for target shareholders, but those that do will raise efficiency problems. If we assume that the post-tender offer price, if the offer is unsuccessful, will be higher than the tender offer price (perhaps $45), we pose a situation that Bradley, supra note 33, at 370–72, found existed generally, whether a subsequent tender offer was made or not. The choices faced by target shareholders are shown in the following matrix:Google Scholar

While the relationships shown here are not the classic prisoner's dilemma, the result is the same. For A, his minimax position is achieved by tendering and receiving $35, rather than not tendering and risking receipt of only $30. The same analysis is true for B. Thus individual strategies to avoid risk will achieve an average of only $35 for each shareholder, while a coordinated effort will obtain $45 if the shareholders agree to refuse the tender offer.Google Scholar

48 In this context, I mean that the transfer of control is inefficient in the Kaldor-Hicks sense, in which gains to bidder shareholders are not greater than losses to target shareholders. See supra note 15. It may be possible, in a larger sense, that rules that allow some such transactions are Pareto optimal for all investors since they encourage takeovers that displace inefficient management, but this is not obvious a priori. I will deal with the larger efficiency implications of this problem for the market for corporate control infra in part V. This analysis raises insuperable obstacles for valuation in appraisal proceedings, since the value established by the average price received by shareholders, as well as the prior market value, may in fact be lower than the value of the firm had the bid failed and the market recognized new value in the target firm. Cf. Mirvis, Theodore N., Two-Tier Pricing: Some Appraisal and “Entire Fairness” Valuation Issues, 38 Bus. Law. 485 (1983). This analysis also supports the “looting” hypothesis rejected by Easterbrook & Fischel in Management's Role, supra note 26, at 1184–85. While Bradley's conclusion, supra note 33, at 364–65, rejects the looting or raiding strategy, it cannot rule it out in all cases. Ruling out this hypothesis in individual cases would require knowledge of the postbid market price of the target's shares had the bid failed based solely on the disclosure of new information about the target and not upon the benefits of new management.Google Scholar

49 Easterbrook & Fischel, supra note 10, at 713, 727 n.77.Google Scholar

50 In the DuPont takeover of Conoco, supra note 47, e.g., DuPont bid $98 cash for 45% of Conoco's shares and 1.7 DuPont shares for each of the remaining Conoco shares, whether tendered or taken in the subsequent merger. At closing on the date of the merger vote, the DuPont stock package was worth $64.81, producing a weighted average of $79.75 per Conoco share. The tender offer of Martin Marietta Corporation for Bendix Corporation stock combined a cash offer of $75 for just over 50% of Bendix's common stock “followed by a proposal to acquire each of the rest of Bendix's shares for Martin Marietta stock valued at ‘approximately $55.’” The offer was given a total value of $1.5 billion, or $65 per share. Martin Marietta Spurns Bendix Offer as “Inadequate” Countering with $75-a-Share Bid for Control of Suitor, Wall St. J., Aug. 31,1982, at 3, col. 1. Bendix was later saved by a “white knight,” Allied Corporation.Google Scholar

51 Coase, Ronald H., The Problem of Social Cost, 3 J.L.& Econ. 1 (1960). Coase demonstrated that imposition of liability rules by an outside authority would not necessarily reduce the amount of “harmful activity” being produced if parties are free to bargain with each other. For example, a polluter may have had an injunction imposed on him, and he may find it advantageous to buy that injunction from the opposing party. The same amount of pollution would be produced, bjit the polluter would have to pay the other party for the privilege of polluting. In the current context, a determination that a majority shareholder had wrongfully used its power over the minority, coupled with imposition of damages, may not stop the majority from behaving in this fashion if the gains to the majority are greater than the damages imposed.Google Scholar

52 It was Coase, Ronald H. who first noted this fact in The Nature of the Firm, 4 Economica (n.s.) 386 (1937).Google Scholar

53 Cf. Demsetz, Harold, When Does the Rule of Liability Matter? 1 J. Legal Stud. 13 (1972).Google Scholar

54 Delaware, at least, has recently abandoned the use of injunctions in connection with most takeouts. Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983).Google Scholar

55 Coase, supra note 51. Thus, if damages are set too high, a majority shareholder may abandon a merger that would otherwise leave all parties collectively better off. The Delaware court's abandonment of its traditional approach to appraisal in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), suggests discomfort with previous attempts to measure damages, although I suspect the court may fear it has previously erred on the low side.Google Scholar

56 This is nothing more than standard marginal analysis, which suggests takeover activities will continue as long as the net returns from such activity are in excess of the returns from other activities available to potential bidders.Google Scholar

57 Those bidders with specialized search and implementation skills can be expected to earn above-average returns (rents), while less skilled players will earn only normal returns on such activity. There will, of course, be mistaken bids that will involve losses for bidders, but such losses will not persist in any systematic fashion. The empirical evidence is consistent with this analysis. The most recent survey of the empirical literature concludes that on average, gains to successful bidders create stock price gains of 4% in the bidders' securities. Jensen & Ruback, supra note 47.Google Scholar

58 Kaldor-Hicks efficiency, defined supra note 15, involves gains for one party sufficient to allow the party to fully compensate any losses suffered by the other party. Total welfare is diminished when gains to one party, such as the bidder, are less than the losses suffered by the other party, such as target shareholders. Jarrell & Bradley, supra note 47, at 403 fig. IV, provide a rare look at the distribution of gains and losses from cash tender offers and demonstrate that a substantial percentage of those studied involved net losses for the shareholders of both firms. For purposes of this analysis, Jarrell and Bradley understate total costs since they look only to stock market proces. Such prices fail to measure total costs to target shareholders where they are unwilling to sell at such prices.Google Scholar

59 The Jarrell and Bradley study, supra note 47, suggests that the introduction of the Williams Act generally lowered overall returns from cash tender offers. But if a takeout occurs at a price target shareholders would not freely consent to, the transaction may still be profitable for the bidder's shareholders, and the target shareholders could suffer all the losses.Google Scholar

60 Gains and losses to target company shareholders are measured by the relationship between the prices received by them and their personal reservation prices (the supply curve for the existing shares of the firm). In Carney, supra note 12, at 114–15, I assumed, for purposes of simplification, that the tender offer price was set by a bidder at exactly the level required to elicit the tender of a bare majority of the shares and was followed by a takeout merger at the same price. Thus, shareholders who tender voluntarily and receive a price above that required to obtain their shares obtain a gain, while those who are forced to relinquish their shares in a takeout at a price they previously declined can be seen as suffering a loss. Figure 1 b in footnote 185 in Carney, supra note 12, illustrates this notion:Google Scholar

Other versions of this model appear infra in note 209. In each case, outcomes for target shareholders as a group depend on whether the area represented as a “premium” is larger than the area represented as “losses.” Since this depends on the slope of a supply curve that cannot be known, absent voluntary transactions that reveal preferences, these losses and gains cannot be measured.Google Scholar

61 Easterbrook & Fischel, supra note 10, at 726–27. The responsiveness of the quantity demanded to a change in price is called the price elasticity of demand. The ratio of the percentage change in quantity consequent to a small percentage change in price is the elasticity of demand. The demand curve is elastic when the percentage change in quantity demanded is greater than the percentage change in price. Armen A. Alchian & William R. Allen, University Economics: Elements of Inquiry 61 (3d ed. Belmont, Calif.: Wadsworth Publishing Co., 1971). While slope and elasticity are not identical, if two straight lines contain a common point, the more horizontal line is more elastic at that point. A demand (or supply) curve that is horizontal is said to be perfectly elastic. A demand (or supply) curve that is vertical is said to be perfectly inelastic. When demand is relatively elastic, an increase in price will reduce revenues to the seller. When demand is is relatively inelastic, an increase in price will increase revenues to the seller.Google Scholar

62 Easterbrook & Fischel, supra note 10, at 727 n.75, citing Scholes, supra note 33, and Miller, Merton H. & Modigliani, Franco, Dividend Policy, Growth, and the Valuation of Shares, 34 J. Bus. 411 (1961). But see Gilson, supra note 26, at 796 n.81, who sees no inconsistency between an upward-sloping curve for the target's stock and Schole's evidence, since a tender offer represents new information that for one buyer there are no substitutes for the target's shares.Google Scholar

63 Scholes, supra note 33.Google Scholar

64 Letter from Frank H. Easterbrook to author (Dec. 20, 1982) (on file with the American Bar Foundation). See also infra note 209.Google Scholar

65 That all target firm shareholders have identical information and transaction costs is implicit in Easterbrook & Fischel's argument.Google Scholar

66 I do not mean to suggest that individual investors cannot purchase research, merely that purchasing the full range of research services in as prompt a manner as institutions can may be excessively costly for a small investor. Institutions may have engaged in sufficient research before a takeout so they have sunk, rather than marginal, costs caused by the takeout, while individual investors may require additional research to reinvest the proceeds of a takeout.Google Scholar

67 Levmore, Saul, Self-assessed Valuation Systems for Tort and Other Law, 68 Va. L. Rev. 771, 850 (1982). Tax and transaction costs were acknowledged as justifying departure from market value in Bell v. Kirby Lumber Corp., 413 A.2d 137, 145 (Del. 1980). The pressure of tax consequences creates an appropriable quasi-rent. Cf. Klein, Benjamin, Crawford, Robert G., & Alchian, Armen A., Vertical Integration, Appropriable Rents and the Competitive Contracting Process, 21 J.L. & Econ. 297 (1978).Google Scholar

68 Thus a stockholder-employee who anticipates the loss of his or her job if the takeover is successful will associate a far higher cost with the transfer of ownership than will an investor with no affiliation with the firm. While simple defense of management positions is hardly a justification for precluding a merger, it is an explanation of why investors may hold different views about the value of particular shares to them. The same may be true of local suppliers of a firm, who anticipate loss of a customer if a particular plant or office is closed as a result of a takeover.Google Scholar

69 This may in some cases be explained by the individual investor's possession of specialized (inside?) knowledge about a specific firm that leads him or her to expect higher returns than most investors believe likely.Google Scholar

70 For a general description of the place of diversification in modern portfolio theory, see Lorie & Hamilton, supra note 28, at 171–97.Google Scholar

71 Perfect elasticity of supply means the supply curve is horizontal, and any increase in price will obtain the tender of all outstanding shares when perfect elasticity of supply is coupled with perfect elasticity of demand for these same shares, presumably at the market price (see Scholes, supra note 33, and Miller & Modigliani, supra note 62), we can expect either no trading or a complete exchange of all the shares of a firm. In short, where supply and demand curves coincide in a horizontal plane, quantity is indeterminate. This model, which follows from Easterbrook's & Fischel's analysis, is intuitively troubling, at the least.Google Scholar

72 Bidders for corporate control clearly do not believe that the supply curve is perfectly elastic for all of the existing shares of target firms or that a slight premium over the previous market price will be sufficient to elicit a tender of 100% of the shares of any firm. Aranow & Einhorn, supra note 17, at 38–40, suggest that selection of the premium over the market price that should be offered should depend in part on the proportion of the outstanding shares represented by the “float,” or shares in the hands of the “public,” on the implicit assumption that shares in the hands of the management group are unlikely to be tendered and represent an inelastic part of the supply curve. On the theory that some investors will be reluctant “for reasons dictated by other than financial considerations” to tender their shares to a bidder less well established than the target, they also suggest that elasticity is partly dependent on the opposition of the target company's management and the relative prestige of the bidder and target. Id. at 40. Past market prices in relation to current market prices are said to be relevant, presumably because some investors are reluctant to take large capital losses. Id. at 39. The authors do not say whether tax or psychological reasons cause this reluctance. The authors also mention that “generous economic incentives will aid in severing the emotional attachments which some investors have to corporate entities.”Id. at 40.Google Scholar

73 Bradley, supra note 33, at 345, found that successful tender offers carried an average premium of 49% over the market price 40 days before the announcement, strongly suggesting an upward-sloping supply curve. A study of the effect of the Williams Act and state takeover acts found that average cash tender offer premiums increased from 32% to 53% after passage of the Williams Act and to 73% after the passage of state laws. Jarrell & Bradley, supra note 47, at 373. Not all shareholders are willing to tender at a premium well over the market price. Cf. Singer v. Magnavox, 380 A.2d 969, 971 (Del. 1977). In Singer, North American Phillips is reported to have offered a premium of 94% over the previous market price for the Magnavox shares, or $9 per share. Douglas V. Austin, Tender Offer Statistics: New Strategies Are Paying Off, Mergers & Acquisitions, Fall 1975, at 9, 18. Even with this generous offer, the holders of only 84.1% of the shares of Magnavox were persuaded to tender. 380 A.2d at 971. This inelasticity should be intuitively obvious when it is realized that a perfectly elastic supply curve implies that shareholders in family-founded enterprises, such as that of the Ford's, would instantly tender if offered any premium over current market prices sufficient to compensate them for lost rents obtained by virtue of their management positions. Coupled with the perfectly elastic demand curve described by Scholes, supra note 33, it suggests an indeterminate price not found in efficient markets.Google Scholar

74 At one time, the Delaware Supreme Court expressed its view of the interests served by merger statutes: “Merger statutes are enacted, not in aid of dissenting shareholders alone, but are as well in aid of majority stockholders, and also in aid of the public welfare if the notion is not entirely outmoded that healthy business corporations are in some degree conducive to the general good.” Salt Dome Oil Corp. v. Schenck, 28 Del. Ch. 433, 41 A.2d 583, 587 (Sup. Ct. 1945).Google Scholar

75 See generally Ralph K. Winter, Government and the Corporation (Washington, D.C.: American Enterprise Institute for Policy Research, 1978), and James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970, at 69–75 (Charlottesville: University Press of Virginia, 1970). Hurst states: “The principal job of corporation law was to satisfy the requirement of utility by authorizing corporate structures which would allow strong centralized control to realize the organizational potential of the corporate instrument.”Id. at 110. Like most observers, the author saw this in terms of shareholder and management relations, rather than in terms of coordinating shareholder desires and providing effective means for the solution of shareholder conflicts. There is evidence that Delaware's corporate law does in fact provide positive benefits for investors. See Dodd, Peter, & Leftwich, Richard, The Market for Corporate Charters: “Unhealthy Competition” vs. Federal Regulation, 53 J. Bus. 259 (1980).Google Scholar

76 By “expected welfare” I mean to implicate probability theory in a rudimentary way, without clearly distinguishing between “value” (money) and utility (which considers the declining marginal utility of money). See, e.g., Aranson, supra note 46, at 39–43; Brudney & Chirelstein, supra note 47, at 57–59; and William A: Klein, Business Organization and Finance: Legal and Economic Principles 145–46 (Mineola, N.Y.: Foundation Press, 1980). Expected value involves weighting possible outcomes according to their relative probabilities of occurrence, e.g., (50%×$100 =$50) + (50%×$200 =$100) =$150.Google Scholar

77 Carney, supra note 12, at 97–100.Google Scholar

78 When agents are delegated powers that include exercising discretion, there is always the risk that the agents will be disloyal and use the powers in their own, rather than in the principal's, interest. To gain the advantages of the agency relationship, some principals may nevertheless choose to delegate broad powers to agents. See generally Coase, supra note 52; and Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976). On the other hand, some principals may attempt to specify employees' behavior in all possible situations, only to fail because of the impossibility of anticipating all contingencies over extended periods of time. In some cases, agents may engage in “opportunistic behavior” to capture one-time gains. Cf. Klein et al., supra note 67.Google Scholar

79 Carney, supra note 12.Google Scholar

80 Cf. Ervin v. Oregon Ry. & Navigation Co., 27 Fed. 625 (S.D.N.Y. 1886), appeal dismissed by stipulation, 136 U.S. 645 (1890). In some instances the justification for overriding the wishes of the minority when they opposed asset sales or mergers was couched in terms of frustration of contract. See Carney, supra note 12, at 87.Google Scholar

81 Originally it was said that shareholders could vote as they pleased, including voting in their own interests. Sneed, Earl, The Stockholder May Vote as He Pleases: Theory and Fact, 22 U. Pitt. L. Rev. 23, 25 (1960); see also Gibson, George D., How Fixed Are Class Shareholder Rights? 23 Law & Contemp. Probs. 283, 299 (1958). Thompson attacked the only two decisions cited on the subject, which both upheld the right of majority shareholders to vote in their own interests. 4 Seymore D. Thompson, Commentaries on the Law of Private Corporations § 4461, at 3288–90 (7 vols. San Francisco: Bancroft-Whitney Co., 1895). Sneed, supra, at 25, notes that the justification for shareholder's voting in their own interest was explicitly based on what might be characterized as an economic rationale, i.e. since stockholders have a common goal of profit, each individual will want to pursue that goal, and by voting in his or her own self-interest will assure the common good. In many treatises the doctrine was qualified by the recognition of limitations placed on shareholders to avoid fraudulent actions when dealing with their corporations and when voting to approve their self-dealing contracts. See 1 Victor Morawetz, A Treatise on the Law of Private Corporations § 477, at 450–52 (2 vols.; 2d ed. Boston: Little, Brown & Co., 1886). Cook used self-dealing cases to state the doctrine rather differently: “The law requires of the majority of the stockholders the utmost good faith in their control and management of the corporation as regards the minority, and in this respect the majority stand in much the same attitude towards the minority that the directors sustain towards all the stockholders.” 2 William W. Cook, A Treatise on the Law of Corporations Having a Capital Stock § 662 (2 vols.; 6th ed. Chicago: Callaghan & Co., 1908). Beach went further, arguing that a “quasi trust relation” existed among stockholders that restrains the majority in its actions toward the minority. 1 Charles F. Beach, Jr., Company Law: Commentaries on the Law of Private Corporations § 70, at 140–42 (Chicago: T. H. Flood &Co., 1891). Beach cited the Ervin case, 27 Fed. 625 (S.D.N.Y. 1886), appeal dismissed by stipulation, 136 U.S. 645 (1890), for this proposition. The other cases cited by Beach involve common frauds that involve interested directors. The abandonment of unanimous consent voting rules created a need for constraints on majority shareholder power. Sneed, supra, at 25–26, traces the application of the doctrine of the shareholder's right to vote in his or her own interests into the period when majority rule was adopted. Treatises that predate the development of majority rule contain no discussion of the shareholder's right to vote in his or her self-interest. See, e.g., Joseph K. Angell & Samuel Ames, A Treatise on the Law of Private Corporations Aggregate (1832; reprint ed. New York: Arno Press, 1972). Once majority rule became the norm, the right to vote in one's own interest was justified on the basis of the identity of the interests of the shareholders in the firm's success. Sneed, supra, at 25–26. It was only in the context of self-dealing, as in fundamental corporate changes, where courts began to see the possibility of conflicts of interest that might require some judicial alteration of attitudes. In the case of daily operations, the issue generally arose in the context of shareholder ratification of actions that were questionable when approved by the directors. Thus it could still be said that generally shareholders could vote in their own interests, but that equity would intervene to prevent fraud. See Colby v. Equitable Trust Co., 124 A.D. 262, 108 N.Y.S. 978, 982, affd mem., 192 N.Y. 535, 84N.E. 1111 (1908), citing Gamble v. Queens County Water Co., 123 N.Y. 91,25 N.E. 201,9L.R.A. 527 (1890). In Gamble, Justice Peckham described his notion of what kind of fraud would be sufficient to challenge an interested shareholder vote: “I think that where the action of the majority is plainly a fraud upon, or, in other words, is really oppressive to the minority shareholders … an action may be sustained by one of the minority shareholders.” 25 N.E. at 202. The opinion went on to note that the unfairness must be such that the court would be convinced that the dominant shareholders could not have been voting with the interests of the corporation in mind but in opposition to its interests. 25 N.E. at 202.Google Scholar

82 The earliest such case is Ervin v. Oregon Ry. & Navigation Co., 27 F. 625 (S.D.N.Y. 1886), appeal dismissed by stipulation, 136 U.S. 645 (1890), which involved a sale of corporate assets to the controlling shareholder at a bargain price approved by the holders of a majority of the corporate stock. The court conceded its inability in many instances to redress many forms of oppression that were short of “actual fraud.” 27 F. at 630–31. But the court was able to construe strictly the corporate purposes clause to preclude this asset sale. 27 F. at 630–31. Perhaps more important, for the purpose of future doctrine, the court wrote: “When a number of stockholders combine to constitute themselves a majority in order to control the corporation as they see fit, they become for all practical purposes the corporation itself, and assume the trust relationship occupied by the corporation towards its stockholders.” 27 F. at 631. No authority was cited for this dictum. A more typical approach is found in the opinion of then Circuit Judge Taft in Central Trust Co. v. Bridges, 57 F. 753 (6th Cir. 1893), in which the author noted that courts often condemn contracts between a corporation and dominant stockholder because dominant stockholders often exert an undue influence over directors of the corporation. 57 F. at 766. Sneed, supra note 81, at 48 n. 131, believes this is the first opinion in which dictum appears that a dominant stockholder is a fiduciary. The reasoning of the Ervin case was adopted without analysis in Southern Pacific Co. v. Bogert, 250 U.S. 483, 487–88 (1919), and in Pepper v. Litton, 308 U.S. 295, 306 (1939), and continued in such opinions as Zah§ v. Transamerica Corp., 162 F.2d 36, 42 (3d Cir. 1947).Google Scholar

83 219 F.2d 172 (2d Cir.), cert. denied, 349 U.S. 952 (1955). It would bean exaggeration to suggest that the control premium literature began after this decision; see, e.g., Adolph A. Berle, Jr., & Gardiner C. Means, The Modern Corporation and Private Property 244 (New York: Macmillan Co., 1932). Berle & Means argue that control is a corporate asset and that the premium for the sale of a control block should go to the corporate treasury. But the control premium literature only flowered at this later date. See, e.g., Andrews, William D., The Shareholder's Right to Equal Opportunity in the Sale of Shares, 78 Harv. L. Rev. 505 (1965); Bayne, David Cowen, The Sale-of-Control Premium: The Definition, 53 Minn. L. Rev. 485 (1969); id., The Sale-of-Control Premium: The Disposition, 57 Calif. L. Rev. 615 (1969); id., The Definition of Corporate Control, 9 St. Louis U.L.J. 445 (1965); id., A Legitimate Transfer of Control: The Weyenberg Shoe-Florsheim Case Study, 18 Stan. L. Rev. 438 (1966); id., Corporate Control as a Strict Trustee, 53 Geo. L.J. 543 (1965); Berle, Adolf A. Jr., The Price of Power: Sale of Corporate Control, 50 Cornell L.Q. 628 (1965); id., “Control” in Corporate Law, 58 Colum. L. Rev. 1212 (1958); Boyle, Anthony John, The Sale of Controlling Shares: American Law and the Jenkins Committee, 13 Int'l& Comp. L.Q. 185 (1964); Brudney, Victor, Fiduciary Ideology in Transactions Affecting Corporate Control, 65 Mich. L. Rev. 259 (1966); Hazen, Thomas L., Transfers of Corporate Control and Duties of Controlling Shareholders—Common Law, Tender Offers, Investment Companies—And a Proposal for Reform, 125 U. Pa. L. Rev. 1023 (1977); Hill, Alfred, The Sale of Controlling Shares, 70 Harv. L. Rev. 986 (1957); Javaras, George B., Equal Opportunity in the Sale of Controlling Shares: A Reply to Professor Andrews, 32 U. Chi. L. Rev. 420 (1965); Jennings, Richard W., Trading in Corporate Control, 44 Calif. L. Rev. 1 (1956); Leech, Noyes, Transactions in Corporate Control, 104 U. Pa. L. Rev. 725 (1956); Lipton, Martin, Sale of Corporate Control; Going Private, 31 Bus. Law. 1689 (1976); O'Neal, F. Hodge, Sale of a Controlling Corporate Interest: Bases of Possible Seller Liability, 38 U. Pitt. L. Rev. 9 (1976); Snell, William N., Reflections on the Practical Aspects of “The Sale of Corporate Control,” 1972 Duke L.J. 1193 (1972); Comment, Sales of Corporate Control and the Theory of Overkill, 31 U. Chi. L. Rev. 725 (1964); Note, The Sale of Corporate Control: The Berle Theory and the Law, 25 U. Pitt. L. Rev. 59 (1963); Comment, Sales of Corporate Control at a Premium: An Analysis and Suggested Approach, 1961 Duke L.J. 554 (1961); and Comment, Sale of Corporate Control, 19 U. Chi. L. Rev. 869 (1952). For a recent critical view of this literature, see Easterbrook & Fischel, supra note 10.Google Scholar

84 Rather than focus on the voting power that went with control, many of these commentators dealt with the issue as one of management or even corporate power. Perhaps typical is the comment of Jennings, supra note 83, at 5: “Under the conventional approach, there appears to be an inclination to regard controlling shares as an ordinary asset which corporate managers may buy and sell with the same freedom which the law permits with respect to other kinds of property” (emphasis added). Berle & Means distinguish between the power to influence the action of the board of directors and the power over the corporation that can be exercised directly through shareholder votes, both of which they argued were subject to fiduciary principles and the sale of control problem, where they observed that the law was not yet well developed. Berle & Means, supra note 83, at 239–46. This did not prevent them from arguing that “all powers granted to a corporation or to the management of a corporation, or to any group within the corporation, whether derived from statute or charter or both, are necessarily and at all times exercisable only for the ratable benefit of all the shareholders as their interest appears.”Id. at 248. From this came the conclusion, which blurred their earlier distinction, that “the power going with ‘control’ is an asset which belongs only to the corporation; and that payment for that power, if it goes anywhere, must go into the corporate treasury.”Id. at 244. See also Berle, The Price of Power, supra note 83, at 638.Google Scholar

85 33 Del. Ch. 293, 93 A.2d 107 (Sup. Ct. 1952).Google Scholar

86 Brudney & Chirelstein, supra note 5.Google Scholar

87 Id. at 336–38. The authors recognize the problem of the prisoner's dilemma discussed supra text at notes 45–48.Google Scholar

88 Id. at 336. Brudney & Chirelstein describe the two-step acquisition as a unitary sale of assets of the target firm. However, because they have already assumed the existence of fiduciary duties on the part of dominant shareholders, they are then able to proceed to a discussion of whether the bidder has violated its newly assumed duty of fairness without discussion of whether it makes sense to impose such a duty in the middle of a unitary transaction.Google Scholar

89 Public choice is the economic study of nonmarket decision making, or the application of economics to political science. It focuses on the problems of aggregating individual preferences to maximize a social (group) welfare function. Dennis C. Mueller, Public Choice 1, 2 (New York: Cambridge University Press, 1979).Google Scholar

90 Brudney & Chirelstein, supra note 5, at 318–25.Google Scholar

91 Id.Google Scholar

92 This is hardly surprising, since the authors admit that there is no unique solution to bargaining in a bilateral monopoly situation. Id., at 316.Google Scholar

93 Brudney & Chirelstein have characterized both negotiated mergers and takeovers by tender offer followed by a takeout merger as essentially purchases of the assets of the business in which the shareholders have an effective vote in the case of a merger and a less effective voice in the case of a tender offer followed by a merger. Id. at 330–38. Modern finance literature characterizes both transactions as successful bids by a management team for control of these assets. Jensen & Ruback, supra note 47.Google Scholar

94 In this article, I have confined my analysis to takeovers where the announced bid is structured to be completed with a second-step takeout merger, either immediately following completion of the first-step tender offer or shortly thereafter.Google Scholar

95 Easterbrook & Fischel, supra note 10, at 700–703, correctly observe that fiduciary duties are an agency concept. However, they proceed to suggest their application in group conflict settings, albeit on a different, i.e., wealth maximization, basis than others. Id. at 737.Google Scholar

96 Even where “constructive” duties are imposed, as in constructive trusts, courts are dealing with disloyal fiduciaries.Google Scholar

97 This article was written prior to the decision of the Delaware Supreme Court in Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), where injunctive relief was rejected in favor of monetary relief. Whether other states will follow Delaware's example is not obvious, since the Weinberger opinion did not provide an explicit justification for this shift.Google Scholar

98 Weinberger, 457 A.2d 701 (Del. 1983), also rejected the business purpose test, again without explicit justification. Possible reasons can be found in Carney, supra note 12.Google Scholar

99 While considerable uncertainty was resolved by the Weinberger opinion, 457 A.2d 701 (Del. 1983), it introduced new uncertainties about the measure of damages by rejecting existing valuation rules.Google Scholar

100 Carney, supra note 12.Google Scholar

101 Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), focused both on the disclosures made to target firm directors and shareholders who were asked to approve the merger and on the conflicts of interest of some target firm shareholders.Google Scholar

102 Id. indicates bidders for Delaware firms will now be certain of their ability to complete takeovers, since injunctions will no longer issue in takeouts on complaints of unfairness. In Lynch v. Vickers Energy Corp., 429 A.2d 497 (Del. 1981) (a case involving charges of breach of fiduciary duties in the context of disclosures in a tender offer by the dominant stockholder), the Delaware Supreme Court remanded to the trial court on the issue of damages. Where the tender offer was at $12.00 and the parent firm had instructed a broker that it was willing to pay up to $15.00 to acquire additional shares in market operations (429 A.2d at 499), the court remanded with instructions that the court should be considering a per share price “between a minimum of $15 and a maximum of $41.40.” 429 A.2d at 505. If this were in the context of a tender offer for 50% of the stock at $15.00 followed by a takeout merger that was challenged and a court considering entire fairness suggested a range of this magnitude, the bidding corporation could face uncertainty about the cost of acquisition of the firm ranging from an average price of $ 15.00 per share to $33.20. In view of the fact that gains to bidding firms are historically modest, as reported by Bradley, supra note 33, this range of possible costs could discourage most takeovers where a takeout merger was required. Easterbrook & Fischel's formula would not introduce this difficulty. The particular formulation of the damage issue in Lynch was rejected in Weinberger, but bidder certainty was not increased. See infra note 106.Google Scholar

103 Easterbrook & Fischel's quotation of Stigler's remarks bears repetition: “Since the fairness of an arrangement is a large factor in the public's attitude toward it, the lawyers as representatives of the public seek to give their schemes the sheen of justice. They employ to this end two approaches. One is to invoke any widely-held belief—on the tacit but convincing ground that any position is invulnerable against nonexistent attack.”Stigler, George J., The Law and Economics of Public Policy: A Plea to the Scholars, 1 J. Legal Stud. 1, 2, 4 (1972), quoted in Easterbrook & Fischel, supra note 10, at 703 n.17. Fairness is an invulnerable position; who is for unfairness? But for lawyers fairness is “a suitcase full of bottled ethics from which one freely chooses to blend his own type of justice.”Id.Google Scholar

104 The Easterbrook-Fischel formulation, based on market prices, is similarly redundant.Google Scholar

105 In Weinberger v. UOP, Inc., 457 A.2d 701, the Delaware Supreme Court rejected the earlier holding of Lynch v. Vickers Energy Corp., 429 A.2d 497 (Del. 1981), that fairness did not involve employment of the appraisal measure of value. At the same time, the Delaware court rejected its former approach to appraisal valuation, which excluded evidence of the type typically presented by modern financial experts concerning discounted cash flows and tender offer premiums. Weinberger, 457 A.2d at 712. While in the long run this acceptance of modern valuation techniques may enhance certainty, it is difficult to see why the court would continue to consider fair value questions in an equitable proceeding when appraisal is available to dissenters. The major distinction may be that the equitable proceeding will allow payment of appraised value to all minority shareholders, whether they dissent or not.Google Scholar

106 While Weinberger provides that the remedy in fairness cases will be the appraisal measure of damages (457 A.2d at 703) as liberalized in the opinion to include elements of future value, uncertainty was re-introduced by the court's statement that fair value in appraisal (or fairness) hearings “also includes any damages, resulting from the taking, which the stockholders sustain as a class.” 457 A.2d at 713.Google Scholar

107 Easterbrook & Fischel, supra note 10, at 732.Google Scholar

108 Appraisal provides protection based on the premerger value of the subject shares, but leaves all of the gains in the hands of the other party. Brudney & Chirelstein, supra note 5, at 304–6. But Weinberger appears to have made this “a very narrow exception to the appraisal process” in Delaware. 457 A.2d at 713.Google Scholar

109 Bayless Manning expressed concern over this problem in The Shareholder's Appraisal Remedy: An Essay for Frank Coker, 72 Yale L.J. 223, 234–35 (1962). This concern is discounted by Eisenberg, supra note 11, at 70–72. Any additional costs may deter some takeovers at the margin, however.Google Scholar

110 But see Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). At least in Delaware it seems most fairness complaints will be treated as claims for monetary damages, unless this remedy appears inadequate, “particularly where fraud, misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable overreaching are involved.” 457 A.2d at 714.Google Scholar

111 Except in Delaware, where Weinberger, 457 A.2d 701 (Del. 1983), overruled the business purpose test announced in Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977).Google Scholar

112 See Carney, supra note 12, at 119–28, for a critique of tests of the “validity” of various business purposes. While the Coase Theorem demonstrates that rules of liability, such as appraisal rights, will not affect outcomes, prohibitions of activities such as takeouts can prevent wealth-creating transactions. Coase, supra note 51.Google Scholar

113 457 A.2d 701 (Del. 1983). The Delaware court concurred with a commentator's observation that the chancellor's treatment of the business purpose test “virtually interpreted [it] out of existence.” 457 A.2d at 715, citing Weiss, supra note 19, at 671 n.300.Google Scholar

114 See supra notes 102 and 106. These higher transaction costs may prevent some wealth-creating transactions. Cf. Demsetz, supra note 53.Google Scholar

115 This “free rider” problem is similar to that described by Grossman, Sanford J. & Hart, Oliver D., Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation, 11 Bell J. Econ. 42 (1980).Google Scholar

116 Reduced delay has always been one of the major attractions of Delaware law to corporate litigants.Google Scholar

117 The costs of federal and state takeover law are studied generally in Jarrell & Bradley, supra note 47.Google Scholar

118 See, e.g., Sommer, supra note 36, and Theis v. Spokane Falls Gaslight Co., 34 Wash. 23, 74 P. 1004, 1007 (1904).Google Scholar

119 Indeed, I have in the past expressed some concerns that shareholders would be unable to protect themselves either by contract or by appropriate market reactions. Carney, supra note 12, at 117–18 nn. 189–90. I now believe those concerns to have been misplaced, for the reasons stated herein.Google Scholar

120 Aranson, supra note 46, at 57.Google Scholar

121 The coercive effect of such two-tier offers has led to several proposals for the creation of an auction market for target shareholders. See, e.g., Bebchuk, Competing Offers, supra note 3, and Lowenstein, supra note 3.Google Scholar

122 The gains to a single shareholder from effecting a coordinated response are only a fraction of total target shareholder gains from coordination and are likely to be dwarfed by the total costs borne by such a shareholder. Alchian & Allen, supra note 61, at 147, define public goods simply as “those for which the extent of consumption or use by one person does not diminish the amount available for other people (once the goods are produced)” (emphasis in original). In this sense, communication of strategic intentions is a public good, but in another it is not, since many authorities also require an inability to exclude others from use as a condition of a public good. See, e.g., Robert S. Main & Charles W. Baird, Elements of Microeconomics 218 (St. Paul, Minn.: West Publishing Co., 1977). Since only broad communication to virtually all target shareholders will perform the desired coordination function, exclusion becomes essentially impossible and, indeed, is not desirable, since the bidder cannot gain any advantage by knowing of the target shareholders' strategy to hold out for a higher price.Google Scholar

123 “Efficient” transactions are “wealth-producing,” as described in note 15, supra. This dichotomy rejects the argument that there are gains in efficient markets from discovering undervalued assets, as suggested by Bebchuk, competing offers, supra note 3, at 1032–33. Lowenstein, supra note 3, concludes instead that securities markets are not efficient for all purposes. Other possible explanations exist, the most obvious being that bidders for oil companies expected rents from oil and gas investments beyond those expected by investors generally. In hindsight, in view of the present price of petroleum, it appears these bidders were mistaken.Google Scholar

124 See, e.g., Grossman & Hart, supra note 115, and DeAngelo, Harry, & Rice, Edward M., Anti-Takeover Charter Amendments and Stockholder Wealth, 11 J. Fin. Econ. 329(1983). Here again I differ with Easterbrook & Fischel, supra note 10, at 714, who “cannot imagine why gains would depend on making some investors worse off,” thus ignoring the prisoner's dilemma and the outcomes graphically depicted in Carney, supra note 12, at 114–15, and discussed supra notes 49–50. Empirical evidence that postexecution market prices can decline below prebid prices is supplied by Jarrell & Bradley, supra note 47, at 394. See also infra note 209, which attempts to illustrate the manner in which I disagree with Easterbrook & Fischel's view of the supply curve for the outstanding shares of a target firm.Google Scholar

125 By “full value” Ido not mean market value as Easterbrook & Fischel do, supra note 10, at714-15. Value in this context means the aggregate value placed on all their shares by the target firm shareholders. This individual valuation represents each shareholder's reservation price or the price that must be offered before he or she will freely consent to sell. For most investors, that price will represent the opportunity cost of the particular investment, which is the return that could be earned on an equivalently risky investment with the same expected value. In addition to that cost, target investors must consider the transaction costs of shifting to such an investment. Capital gains taxes, and research and brokerage costs may be included in this category. Finally, because of his specialized knowledge of an industry or a firm, an investor may believe he can collect rents (returns above opportunity costs) by continuing to hold a target's shares, because he believes he has knowledge of future prospects not yet perceived by others. Even the more liberal approach to appraisal adopted in Weinberger, 457 A.2d 701 (Del. 1983), is unlikely to capture all these elements.Google Scholar

126 See Bebchuk, Competing Offers, supra note 3, and Lowenstein, supra note 3.Google Scholar

127 See discussion infra text at notes 199–200.Google Scholar

128 Bebchuk, Competing Offers, supra note 3, at 1040 n.60, asserts that only competing offers enable target shareholders to obtain a share of the gains from takeovers. This ignores the coordination devices discussed hereinafter. But he is partially correct in that competition is one way in which such gains may be shared. The effect of competition will be to bid up the cash portion of the tender offer for control to the point where the average price per share offered by the bidder for all shares of the target will be at least equal to the expected value of all shares should the tender fail. Thus in our example, supra note 47, the average price was $37. If the bidder still proposes to take 50% of the stock at $30, then the tender offer under competitive conditions must be at a price of not less than $44 to achieve an average price of at least $37. Anything less should elicit a competing bid of at least $44, since gains will remain merely from the transfer of ownership at an average price of less than $37. This higher control premium will not eliminate the prisoner's dilemma facing target shareholders, however. Indeed, it may exacerbate it:Google Scholar

Thus, if A considers not tendering, her outcome may be either $37 or $30. If A tenders, she will receive either $44 or $35. Both her expected outcome and her minimax position dictate tendering. Transaction costs will preclude many such tender offers in a competitive market, and it will be necessary for efficiency gains to amount to a substantial sum to offset these transaction costs.Google Scholar

129 Bradley, supra note 33, examined the returns to bidding firms that successfully completed tender offers and found that extraordinary rates of return were not being earned on acquisitions. Bradley argues that this is attributable either to competition from other bidders or to their potential competition or to the resistance of target managers to bids that are too low. The latter explanation is suspect to the extent Bradley argues that target managers help capture the gains for target shareholders, since nothing would predict, under conditions of bilateral monopoly, that the sellers would always capture all of the gains from an exchange. More recent studies suggest that efficient markets have capitalized the expected value of acquisition programs at a relatively early stage, so a bidder's success in a particular acquisition may not provide positive new information about expected returns. Katherine Schipper & Rex Thompson, Evidence on the Capitalized Valueof Merger Activity for Acquiring Firms, 11 J. Fin. Econ. 85 (1983); and Paul Asquith, Robert F. Bruner, & David W. Mullins, Jr., The Gains to Bidding Firms from Merger, 11 J. Fin. Econ. 121 (1983). A review of allofthe evidence concludes bidders experience stock price gains of 4%. JensenA Ruback, supra note 47. To the extent the lack of abnormal returns can be explained by management resistance to hostile takeovers, it says nothing about the competitive nature of markets for corporate control. Grossman & Hart, supra note 115, at 58, point out that the presence of ex ante costs of research and information collection will tend to limit ex post competition, since once one raider has invested in determining what steps will enhance the value of a particular target, other raiders without this knowledge will not be able to compete effectively with the informed raider. Competition would reduce any return on their sunk information costs. See also Easterbrook & Fischel, Management's Role, supra note 26. Evidence of competing bidders in some spectacular cases may be explained in part on the basis of target management cooperation with a “white knight,” or friendly bidder, coupled with assurances of target management opposition to the first bidder. One study reports that where there are competing bids, the first bidder was unsuccessful in 75% of the cases. This study also reports that successful bids generally exhaust gains for unsuccessful bidders and concludes that the market for control of specific corporations is competitive. Ruback, Richard S., Assessing Competition in the Market for Corporate Acquisitions, 11 J. Fin. Econ. 141 (1983). To conclude from a study of competing bids that such markets are generally competitive, when many markets involve a single bidder, is at least bold. Finally, the Bradley study examined stock prices of bidders and targets for only 40 days after the announcement of a bid, when bidder gains from a subsequent takeout may have been discounted for uncertainty of price.Google Scholar

130 Grossman & Hart discuss this in detail, supra note 115, at 50–53. They argue that allowing some dilution of the interests of nontendering shareholders is desirable, since it encourages hostile tender offers that constrain firm management from shirking activities. They argue that allowing a large amount of dilution provides the maximum constraints on current management and is thus desirable if no raid is successful for the particular firm. But if a raid is successful (and allowing large amounts of dilution encourages raids), then such large amounts will work to the disadvantage of the shareholder group. The authors conclude that the optimal amount of dilution is indeterminate because of these factors. DeAngelo & Rice, supra note 124, recognize this difficulty, but minimize its importance because of the prisoner's dilemma faced by target company shareholders, who are thus persuaded to tender at a lower price than they might if they were coordinated.Google Scholar

131 Manne, supra note 16, at 118, points out that competitors are the firms most likely to be able to evaluate target firm management to determine if gains from improved management are possible. A recent study points out that unlike previous merger movements, the current wave of acquisitions does not involve acquisition of competitors but rather diversification by firms that could no longer acquire competitors. Malcolm S. Salter & Wolf A. Weinhold, Merger Trends and Prospects for the 1980s 3–14 (Graduate School of Business Administration, Harvard University, Dec. 1, 1980).Google Scholar

132 Securities and Exchange Commission, Cost of Flotation of Registered Issues 1971–1972, at 8–9, 24–29 (Washington, D.C.: Government Printing Office, 1974); James S. Mofsky, Blue Sky Restrictions on New Business Promotions (New York: Matthew Bender & Co., 1971). While recent amendments (such as form S-l 8) to certain rules are designed to reduce the cost of raising capital for smaller firms for offerings under $5 million, this is more than offset by the SEC's provisional adoption of rule 415, 17 C.F.R. 230.415 (1982), adopted in SEC Securities Act Release No. 6383, [1982 Decisions] Fed. Sec. L. Rep. (CCH) §72,328, and extended in Release No. 6423, [1982 Decisions] Fed. Sec. L. Rep. (CCH) §83,250, which appears mainly to be useful to larger corporate issuers. See New Ball Game: Investment Bankers Enter a Different Era, and Many Are Uneasy, Wall St. J., June 21, 1982, at 1, col. 6. The article also notes that major issuers are engaging in large offerings without the use of an underwriting firm, because their presence in worldwide financial markets is greater than that of most underwriting houses.Google Scholar

133 See generally Aranow & Einhorn, supra note 17; Aranow et al., supra note 17; and Fleischer, supra note 17. The only study on the subject estimates transaction costs of tender offers undertaken during 1956–70 at between 14% and 20% of the value of the shares acquired. Smiley, Robert, Tender Offers, Transactions Costs and the Theory of the Firm, 55 Rev. Econ. & Statistics 22 (1976). Here I have no disagreement with Easterbrook & Fischel's earlier criticism of management's defensive tactics. Easterbrook & Fischel, Management's Role, supra note 26.Google Scholar

134 See, e.g., Aranow & Einhorn, supra note 17, at 266–68; Aranow et al., supra note 17, at 104–42; Fleischer, supra note 17, at 129–34; 1 Lipton & Steinberger, supra note 17, at 304–10.Google Scholar

135 Aranow & Einhorn, supra note 17, at 266–68; Aranow et al., supra note 17, at 147–60; Fleischer, supra note 17, at 120–29; 1 Lipton & Steinberger, supra note 17, at 310–12.Google Scholar

136 Aranow & Einhorn, supra note 17, at 266–68; 1 Lipton & Steinberger, supra note 17, at 168–72; see, e.g., General Host Corp. v. Triumph American, 359 F. Supp. 749 (S.D.N.Y. 1973).Google Scholar

137 Compare Condec Corp. v. Lunkenheimer Co., 230 A.2d 769 (Del. Ch. 1967) (invalidating stock issued to dilute holdings of successful bidder), and Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir. 1981) (invalidating “lock-up” stock option to friendly bidder), with Marshall Field & Co. v. Icahn, 537 F. Supp. 413 (S.D.N.Y. 1982) (approving “lock-up” agreement to issue shares to friendly bidder).Google Scholar

138 See Aranow et al., supra note J7, at 207–45. For a critical view of these statutes, see Fischel, supra note 26, at 26–29, and Winter, supra note 75, at 42–44. The Illinois takeover statute was invalidated in Edgar v. Mite Corp., 102 S. Ct. 2629 (1982). Since that time some state legislatures appear to have moved to limit the power of two-tier offers. Indiana now requires offers to be made equally to all offerees and provides that if persons outside the proration pool do not receive the same proportion of various kinds of consideration as those within the pool, the statute is violated, thus effectively eliminating prorating within any time limit, in much the same manner as Exchange Act Rule 14d-8, supra note 35. Ind. Code Ann. § 23–2-3.1-6.5, as amended, quoted in 1A Blue Sky L. Rep. (CCH) (Ind.) §23,207. The statute appears to require the consideration for takeouts to be equivalent to that of a tender offer made within the preceding two years. § 23–2-3.1-8.4, reported in 1A Blue Sky L. Rep. (CCH) (Ind.) §24,210. Maryland appears to be considering a bill that would mandate supermajority (80%) voting, independent shareholder ratification (by a two-thirds vote), and fair price standards in a new bill. Maryland Bill on Takeovers Spurs a Fight, Wall St. J., May 26, 1983, at 31, col. 3.Google Scholar

139 See Grossman & Hart, supra note 115, and DeAngelo & Rice, supra note 124.Google Scholar

140 The information and analysis is not a public good of the kind described in supra note 122, in part because some exclusion is possible by the first bidder's simple nondisclosure of the details of its evaluation. Simple identification of the target as a takeover prospect appears to be a public good and enhances the target's stock price even in the case of failed tender offers. Bradley, supra note 33. But other prospects must still determine why the target is a takeover prospect and whether they can profit by purchasing this target.Google Scholar

141 Expected value is defined supra note 76. This analysis assumes the second bidder is not a “white knight” favored by target management with a better than even chance of success. Grossman & Hart, supra note 115, at 58, argue that once the first bidder has sunk its research costs, the second bidder can anticipate no return on a similar research investment. To the extent that other costs must be sunk, such as legal fees, brokers' fees, and fees of proxy soliciting firms, the same analysis should apply to these costs.Google Scholar

142 This procedure can be explained on the basis of the marginal return from the expenditure of additional dollars in a takeover fight. If a modest additional effort will capture the prize, where its absence assures loss of the prize, all the gains can be attributed to the marginal expenditure. A prospective bidder considering whether to enter the fray must consider whether to sink the original costs, which may consist of research costs, an investment banker's retainer, a lender's commitment fee, as well as making additional expenditures (e.g., fees for lawyers, public relations firms, and the like) as the battle goes on.Google Scholar

143 Consider the following game, which may be somewhat analogous to the problem of a corporation considering whether to become a competing bidder in a tender offer fight (assuming target company management is either neutral or resists both bids). Assume a seller offers a dollar bill for sale to two persons, with the only conditions being that the bids for the dollar must go up in minimum increments of 5 cents and that the seller gets to keep both bidders' last bids. Absent collusion, one can easily see the bidding proceeding rapidly to 95 cents versus 90 cents. Why would one of the bidders bid $ 1.00 to gain $ 1.00? Remember that each bidder must give up his last bid in any event Oust as the tender offerer loses the transaction costs). Thus the choice to the current low (90 cents) bidder is to give up and lose 90 cents or bid $1.00 and break even. Once the bid has risen to $ 1.00, the choice of the other bidder is to give up and lose 95 cents or bid $1.05 and lose 5 cents. These choices will continue to face both bidders as they continue to bid up the price they will pay for the dollar. Since past bids are spent, only the marginal cost is relevant to each bidder. Obviously a bidder who understands this game will not choose to get involved, just as a second prospective bidder may prefer to find a one-bidder game. See Shubik, Martin, The Dollar Auction Game: A Paradox in Noncooperative Behavior and Escalation, 15 J. Conflict Resolution 109 (1971).Google Scholar

144 This analysis also applies to firms considering an initial hostile tender offer in an “auction market” where a competing bid is likely, as suggested by Bebchuk, Competing Offers, supra note 3, and Lowenstein, supra note 3.Google Scholar

145 The destructive nature of the bidding game described in supra note 143 may be the phenomenon witnessed in some recent takeover battles, such as the bidding for Conoco by Seagrams, Dupont, and Mobil. But the very competitiveness of such struggles may be good reason to avoid takeover attempts unless the ex ante probability of above-normal gains is quite high. Some evidence of the level of costs appears in a recent article, where First Boston Corporation was reported to have contracted with Dupont for a fee of $750,000 in the event Dupont's bid for Conoco was unsuccessful. Total fees for two pending takeovers were reported at $55 million. Merger Advisers Say the Big Fees They're Charging Are Warranted, Wall St. J., July 17, 1981, at 29, col. 4.Google Scholar

146 These circumstances may arise either where the first bidder has submitted a “low-ball” opening offer or where the second bidder has the support of target management or some combination of both.Google Scholar

147 In a bilateral monopoly a single seller faces a single buyer, where the commodity traded has no close substitute and the seller has no other outlet. Donald S. Watson, Price Theory and Us Uses 362 (2d ed. Boston: Houghton Mifflin, 1968). Monopsony involves a single buyer, but more than one seller. Thomas J. Anderson, Our Competitive System and Public Policy 25–26 (Cincinnati: South-Western Publishing Co., 1958). Conditions of bilateral monopoly may exist where a buyer discovers gains from synergy by acquiring a particular firm that has a unique combination of factors such as geographic markets, product mix, and firm size, while a target may discover that a particular bidder is uniquely qualified for many of the same reasons or for others such as research abilities, marketing skills, etc. In monopsony, the target shareholders of the same firm may simply be disorganized and present the single bidder with many sellers.Google Scholar

148 Watson, supra note 147, at 363, indicates that quantity is determinate in bilateral monopoly, but price is not. DeAngelo & Rice, supra note 124, at 17, conclude that the tender offer price will generally not be as high as the bidder is willing to pay under these conditions. It is important to relate value only to the firm as owned by current stockholders, because other owners may face different (in some cases, lower) agency costs.Google Scholar

149 See DeAngelo & Rice, supra note 124. If bidders generally earn no more than normal returns on takeovers, according to Bradley, supra note 33, what evidence supports the notion of monopsony? Some studies report abnormal gains for bidders, who may possess valuable information specific to a target. Jensen & Ruback, supra note 47. In other cases, economic rents in the form of transaction costs may be captured by other participants in the takeover process. These participants can include lawyers and brokers (for both bidder and target); state and federal securities officials and other regulators; and officers and directors of targets who obtain extraordinary employment contracts in anticipation of a takeover, the cost of which will be borne by the target firm later, after the acquisition.Google Scholar

150 Evidence of such transfers can be inferred from the incidence of negative returns to nontendering target shareholders demonstrated by Jarrell & Bradley, supra note 47, at 394. Grossman & Hart, supra note 115, at 60, indicate that socially this is not a problem “if investment is interest-inelastic,“ because a larger threat of takeovers should make target management very efficient. However, if investment is interest elastic, tow tender prices received by investors will reduce investments in firms subject to takeovers. Grossman & Hart do not discuss diversification as a method of minimizing risk in takeouts. Diversification should provide protection against such a risk, although this article examines coordination as an alternative means of reducing that risk.Google Scholar

151 Diversification cannot protect investors generally from the transaction costs associated with takeovers. To the extent the costs of coordination devices are lower than such transaction costs, diversified investors will have incentives to adopt coordination devices.Google Scholar

152 This alignment of interests of management and shareholders solves the usual shareholder apathy problem, first identified in Manne, supra note 31, at 1440–42. His work was based on that of Anthony Downs, An Economic Theory of Democracy 265 (New York: Harper & Bros., 1957). This work identified information as a public good, with each shareholder facing the problem of reaping only a small fraction of the marginal benefits while faced with the entire marginal cost of production, since all other shareholders would be tempted to free ride on his efforts. The result would be underproduction of the public good. See also Clark, Robert C., Vote Buying and Corporate Law, 29 Case W. Res. L. Rev. 776, 779 (1979), and Gil-son, supra note 26, at 829, for the use of the phrase “rational apathy” to describe this phenomenon. While this alignment of interests does assure some proposals to make it more costly for bidders to acquire firms, it does not assure that management will not attempt to use the same shareholder apathy to go too far and impose nearly absolute barriers to takeovers.Google Scholar

153 See, e.g., Proxy Statement of Universal Leaf Tobacco Co., Inc. (Jan. 21, 1977), reprinted in 2 Lip-ton & Steinberger, supra note 17, at L-l; Proxy Statement of Rubbermaid, Inc. (Mar. 24, 1978), reprinted in id. at L-2 (“While a shareholder may believe the offer is inadequate, such holder may nevertheless tender shares to avoid possible future transactions undertaken by the successful tender offeror which may be to the shareholder's disadvantage”). Proxy Statement of Executive Industries, Inc. (May 30, 1979), reprinted in id. at L-3 (“While it is recognized that all tender offers are not made with the intention of eliminating minority shareholder interests and that the terms offered may be fair, the Board of Directors nevertheless believes that the terms of a non-negotiated takeover may often be less favorable to the shareholders of the target corporation than those which might be obtained in a transaction negotiated by its board of directors”).Google Scholar

154 Critics have expressed the concern that shark repellent amendments are designed principally to insulate management from the threat of takeovers, regardless of how poor management's performance may have been. The literature is massive and forceful. Fischel, supra note 26, at 31, states: “If a small minority of shareholders can block a merger, the gains to be expected from a successful tender offer and the incentive to tender are reduced.” Cohn, supra note 26, at 520, states: “Supermajority provisions may render shareholders—and even management—powerless to react to changed economic conditions, however material their impact.” Gilson, supra note 26, at 797–98, casts doubt on the efficacy of these requirements, since many of them can be waived by the target's board of directors, and he believes that the board will often find it in the interest of the members to cooperate with a new majority shareholder. My own study indicates that these votes may not be as impossible to obtain as many observers feel. See infra note 170. They may be effective, however, where incumbent management owns a substantial block of shares. In a recent contested tender offer for 49% of the stock of Mesa Petroleum Company, which had a 75% voting requirement for mergers with related entities, Mesa's advisers felt that getting approval of 75% of the shares would be very difficult, since “[t]hey say about 10% of any company's stock never is tendered under a hostile offer. They note that Mr. Pickens [Mesa's chairman] personally controls another 6% of Mesa and that a number of large Mesa shareholders are intensely loyal to Mr. Pickens.” Mesa Chairman Readies a Counterattack As Cities Service's Bid Is Undersubscribed, Wall St. J., June 14, 1982, at 3, col. 2.Google Scholar

155 Infra text at notes 158–72.Google Scholar

156 Infra text at notes 173–81.Google Scholar

157 Infra text at notes 182–87.Google Scholar

158 “Expected value,” defined supra note 76, involves the weighting of possible outcomes, which in this case will involve sale or no sale, and the various prices at which sales might occur. Various voting rules can affect both the average price per share that a bidder must pay to acquire a sufficient interest to take out the remaining investors and the likelihood that a bidder will pay such a price. Setting aside for the moment the possibility of no sale and the value of the firm if it continues under current management, we will here consider only the expected value of a sale. Grossman & Hart, supra note 115, discuss this problem in some detail.Google Scholar

159 See supra note 61.Google Scholar

160 Cf. Easterbrook & Fischel, Management's Role, supra note 26, at 1164. Given elasticity of demand for the shares of the target firm (see Scholes, supra note 33), a more restrictive voting rule that increases the average expected price per share if the firm is sold will reduce the probability of a sale. This is illustrated in the graphs below, where the vertical scale measures both the probability of a sale occurring and the price that might be obtained and the horizontal scale represents the decision rules that might be adopted (from giving a power of sale to any one shareholder to unanimous consent). The price curve is also the supply curve for the particular security. The figure on the left represents the possible effect of various decision rules on both probability of sale and price to be obtained. The figure on the right represents the probable value obtainable from each voting rule.Google Scholar

The table gives the calculations on which the figures are based. For purposes of simplification, decision costs, such as the costs of negotiating with holdout shareholders, have been excluded from the calculation. Thus, under this model, rational shareholders would maximize the expected value of the firm upon sale with a 75% voting rule. Given uncertainty about the probabilities of an actual sale, the calculation would be much more complex. This analysis also ignores the indeterminacy that can be introduced into the calculation in order to constrain current target firm management by increasing the risk of a takeover at a low price, as long as there is a chance that it will be unsuccessful. See Grossman & Hart, supra note 116. at 50ff.Google Scholar

161 Here I disagree with the position of Easterbrook & Fischel, who argue that all devices to increase the price received by target shareholders in the aggregate are contrary to investor interests. This implies the demand for target firms is highly elastic over the relevant range of the demand curve, so any increase in the price of target shares will sharply reduce the aggregate revenues of target shareholders. Cf. Easterbrook & Fischel, supra note 10, at 709, and id., Management's Role, supra note 26, at 1174. This is contrary to the market evidence provided by DeAngelo & Rice, supra note 124, and Linn, Scott C. & McConnell, John J., An Empirical Investigation of the Impact of “Antitakeover” Amendments on Common Stock Prices, 11 J. Fin. Econ. 361 (1983). Only if all takeovers are efficient could it be true that any reduction in the investment in the search for takeover targets would harm investors.Google Scholar

162 Grossman & Hart, supra note 115, argue that it is in the interests of shareholders to set decision rules low enough to encourage takeovers at a greater rate than may maximize the expected value of the firm upon sale, because this will constrain existing management to a greater degree and lead to an increased value if the current management remains in control. Since, ex ante, the likelihood of a hostile tender offer for any given firm is quite low, this may well lead to a maximization of the expected value of the firm. See also Mueller, supra note 89, at 28–38.Google Scholar

163 I use the term “inefficient” here to mean something less than Kaldor-Hicks efficiency, in the sense that losses to nontendering shareholders are not exceeded by the aggregate gains to both tendering shareholders and to the bidding corporation. See supra note 15.Google Scholar

164 DeAngelo & Rice, supra note 124, at 25, studied 74 supermajority proposals. Most provided voting requirements in the range of 66§ to 80%, although some set voting requirements as high as 95%. Linn & McConnell, supra note 161, studied 280 supermajority proposals. Id. at 3. See also Hochman & Folger, supra note 26, at 548; Fleischer, supra note 17, at 18; 1 Lipton & Steinberger, supra note 17, §6.2.3, at 265–71; Cohn, supra note 26, at 481–82; Gilson, supra note 26, at 783–84; Fischel, supra note 26, at 30. For a description of the adoption of such an amendment after a hostile tender offer had begun, see Buford, Robert P., Amending the Corporate Charter, 32 Bus. Law. 1353 (1977).Google Scholar

165 Each shareholder will recognize that the holders of only 10% of the shares can suffer a takeout merger if it is assumed that nontendering shareholders will vote against a takeout merger.Google Scholar

166 DeAngelo & Rice, supra note 124, at 19 n.14, argue that supermajority rules reduce incentives to tender because of the prisoner's dilemma, first because it reduces a shareholder's expectation that the required percentage for a takeout will be tendered, and second because other shareholders will have the same reduced expectation and will be less likely to tender as a protective measure. Whether this is true depends on the elasticity of the supply curve for the shares of the target firm. If, as Easterbrook & Fischel, supra note 10, at 726–27, suggest, the supply curve is perfectly elastic and all shareholders face the same prisoner's dilemma, supermajority voting rules should not reduce the likelihood of successful tender offers. On the other hand, if the supply curve is not perfectly elastic, as suggested by Bradley's evidence that not all tender offers at prices above the previous market price are successful, then the probability that other shareholders will tender is reduced by some indeterminate amount ex ante. Bradley, supra note 33. The difficulty is that the individual shareholders cannot predict the amount of the reduction, although risk arbitragers, with their greater experience, may serve this function and send signals to other investors about the probable success of a tender offer.Google Scholar

167 A supermajority voting rule may, as a practical matter, require a bidding firm to make a tender offer for enough shares to assure a favorable vote on the takeout merger. Assuming no efficiency gains from the transaction and no transaction costs, such transactions will become much less likely if a tender offer is made solely on the basis of the prisoner's dilemma that target shareholders face. A bid of the sort described in supra note 47 is no longer possible. E.g., if a two-thirds vote is necessary to approve a merger with a related party, and the bidder determines to acquire two-thirds of the shares by tender offer purely to capture a wealth transfer from the minority, a price higher than $30.00 must be paid for two-thirds of the shares. If simple majority rule were in effect, a bidder could pay up to $44.00 for 50% of the stock and still profit from the mere transfer if the firm is worth $37.00 with a takeout at $30.00. The highest bid possible where the bidder seek two-thirds of the shares to obtain an average price of $37.00 is $41.50. Not only is this lower than the highest bid possible if simple majority rule were in effect, it must elicit a tender of more shares—two-thirds rather than one-half. Supermajority voting thus does not eliminate the prisoner's dilemma, but makes it less likely that it will have the power it once did to cause the complete transfer of the firm. It thus changes expected outcomes for target shareholders.Google Scholar

168 The proposed Maryland bill described supra note 137 appears to mandate an 80% vote. There is no evidence to suggest this is the efficient voting rule that should be adopted in all cases. Mandatory state provisions eliminate the ability of firms to seek out the provisions that maximize firm value. If these provisions are excessively restrictive, shares of firms incorporated in Maryland will experience a one-time decline, described infra text at notes 227–29. On the other hand, state adoption of simple majority voting has been associated with a decline in stock prices in the case of Delaware. Linn &McConnell, supra note 161.Google Scholar

169 The only studies to date do not separate supermajority votes by the percentage vote required. DeAngelo & Rice, supra note 124; and Linn & McConnell, supra note 161. It would be unlikely that a single rule would be efficient for all firms. The greater the likelihood of a “taking” from a nontendering minority, the higher the optimal voting rule will be. James M. Buchanan & Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy 82 (Ann Arbor: University of Michigan Press, 1962).Google Scholar

170 Supermajority voting requirements are often, but not always, protected by charter amendments that also require a similar supermajority to amend them—so-called “lock up” amendments. See Linn & McConnell, supra note 161; Cohn, supra note 26, at 481–82, and Gilson, supra note 26, at 790–92. Critics have expressed concern that these requirements are set at impossibly high levels, thus giving management perpetual protection from hostile tender offers. See, e.g., Fischel, supra note 26, at 31, and Gilson, supra note 26, at 792, 823–27. These criticisms ignore the fact that amendments that discourage hostile tender offers to an excessive degree should depress stock prices to the point where bidders can afford to pay a sufficient premium to management to approve a merger. While I know of no systematic studies examining the percentage of outstanding shares of various classes voted in favor of mergers and similar fundamental changes, the reports do contain examples of high votes being obtained, presumably when the price is right. See, e.g., Broad v. Rockwell Int'l Corp., 642 F.2d 929, 934 (5th Cir. 1981) (84.5%); Honigman v. Green Giant Co., 208 F. Supp. 754, 757 (D. Minn. 1961) (92.3% of class B common and 100% of class A common voted for recapitalization); Imperial Trust Co. v. Magazine Repeating Razor Co., 138 N.J. Eq. 20, 46 A.2d 449, 451 (Ch. 1946) (merger approved by 98.2% of preferred and 78.72% of common); Heffern Coop. Consol. Gold Min. & Mill. Co. v. Gauthier, 22 Ariz. 67, 193 P. 1021 (1920) (85.4% of outstanding shares voted for merger); Schiff v. RKO Pictures Corp., 104 A.2d 267 (Del. Ch. 1954) (91% voted in favor of sale of assets); Levin v. Great W. Sugar Co., 406 F.2d 1112, 1115 (3d Cir.), cert, denied, 396 U.S. 848 (1969) (merger approved by holders of 92% of shares); David J. Greene & Co. v. Dunhill Int'l, 249 A.2d 427 (Del. Ch. 1968) (90% voted for merger), and DuPont, supra note 47 (merger approved by holders of 97% of shares). Similar examples can be cited for rules requiring ratification by shareholders unaffiliated with the proposed merger partner. See infra note 176. Similarly, attractive tender offers can enable a bidder to purchase the shares required for supermajority votes. See, e.g., Bell v. Cameron Meadows Land Co.,669F.2d 1278, 1280 (9th Cir. 1982) (96%); Broad v. Rockwell Int'l Corp., 642 F.2d 929, 934 (5th Cir. 1981) (75%); Indiana Nat'l Bank v. Mobil OU Corp., 587 F.2d 180, 182 (7th Cir. 1978) (“substantially all of the outstanding available shares”); Nash v. Farmers New World Life Ins. Co., 570 F.2d 558, 560 (6th Cir. 1978) (95%); Alcott v. Hyman, 42 Del. Ch. 233, 208 A.2d 501, 504 (Sup. Ct. 1965) (97.5% of common, 95.7% of debentures and 95.3% of warrants); Abelow v. Midstates Oil Corp., 41 Del. Ch. 145, 189 A.2d 675 (Sup. Ct. 1963) (95.3%); DuPont, supra note 47 (94%); and Kennecott Copper Says It Has Received 96% of Carborundum Stock, Wall St. J., Jan. 6, 1978, at 17, col. 1.Google Scholar

171 Whether total target shareholder utility is maximized depends on the degree of risk aversion of investors in the target firm. For some groups, a greater variance in results will more than offset a gain in aggregate shareholder wealth. Easterbrook & Fischel, supra note 10, at 712, correctly point out that the risk of disparate treatment in takeouts is a nonsystematic risk (one specific to a firm) against which investors can obtain protection through portfolio diversification. They argue that “the existence of diversification —not its employment—supports our argument for allowing the gains from corporate control transactions to be apportioned unequally.”Id. at 713. They describe one-stock portfolios as involving a greater risk that has been chosen by investors, but a risk that carries no legal implications. While diversification is possible for most, if not all, investors (one might exclude employees who are only investors through ESOPs that invest exclusively in the employer and those facing such high capital gains taxes that diversification carries prohibitive costs), investors act as if avoidance of extreme disparities is valuable, notwithstanding the possibility of diversification, in adopting some of the types of amendments observed herein.Google Scholar

172 Unanimous consent rules create hold out problems and strategic behavior that can raise shareholder transaction costs dramatically.Google Scholar

173 Hochman & Folger, supra note 26, at 549. See, e.g., Article Nine of Sabine Royalty Corporation's Articles of Incorporation, reprinted in 1 Lipton & Steinberger, supra note 17, at 266–71 (requiring approval of the holders of 66 §% of the voting securities of the corporation, excluding all securities owned by an acquiring entity that holds 30% or more of its stock); Proxy Statement of Baldor Electric Co., (Mar. 30, 1979), reprinted in Fleischer, supra note 17, 400–21, at 400–25 (requiring approval of the holders of at least 50% of the voting power other than a controlling shareholder).Google Scholar

174 See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701, 703 (Del. 1983) (holding that where a plan of merger required approval of the holders of a majority of the shares not held by the controlling shareholder the burden of proof remains with the plaintiff to show the transaction was unfair to the minority). See also Securities Exchange Act, schedule 13E-3, item 8(c), 17 C.F.R. § 240.13e-3 (1982), reprinted in 2 Fed. Sec. L. Rep. (CCH) §23,706, which requires a discussion of the fairness of certain going private transactions, considering, inter alia, “whether the transaction is structured so that approval of at least a majority of unaffiliated security holders is required.” See also Levin v. Great W. Sugar Co., 406 F.2d 1112, at 1120 (3d Cir.), cert, denied, 396 U.S. 848 (1969), and Porges v. Vadsco Sales Corp., 27 Del Ch. 127, 32 A.2d 148, 151 (1943).Google Scholar

175 Such reasoning involves a form of the fallacy of composition, where one reasons from the properties of constituent parts of the whole to the properties of the whole itself. Carney, supra note 12, at 110–11 n.175.Google Scholar

176 The impact of these ratification rules depends to a large extent on the shape of the supply curve for the outstanding shares of the firm. To the extent the curve is nearly horizontal over much of its length, and thus highly elastic, nontendering shareholders will recognize that their fellow shareholders are likely to respond positively to offers only slightly above current market prices. Indeed, to the extent the prior tender offer was oversubscribed, remaining shareholders may view approval of a takeout merger on terms not extremely different from those of the tender offer as a foregone conclusion. On the other hand, if the prior tender offer was barely subscribed, nontendering shareholders may hold out for a higher price and attempt to “free ride” on the enhanced values expected to result from the merger. This is the view of Easter-brook & Fischel, supra note 10, at 710–11. See also Grossman & Hart, supra note 115. If this argument holds, then second-stage ratification should become virtually impossible. Yet reported cases, by no means a careful sample, indicate that such ratification is often obtained by high votes. See, e.g., Levin v. Great W. Sugar Co., 406 F.2d 1112, at 1115 (3d Cir.), cert, denied, 396 U.S. 848 (1969); Kohn v. American Metal Climax, 322 F. Supp. 1331, 1343 (E.D. Pa. 1970), appeal dismissed in part, modified in part, 458 F.2d 255 (3d Cir. 1972), cert, denied, 409 U.S. 874 and sub nom.; Roan Selection Trust Ltd. v. Kohn, 409 U.S. 874 (1972); Harman v. Masoneilan Int'l, 442 A.2d 487 489 (Del. 1982); Weinberger v. UOP, Inc., 457 A.2d 701, 708.(Del. 1983); and Schiff v. RKO Pictures, 104 A.2d 267, 270 (Del. Ch. 1954).Google Scholar

177 Easterbrook & Fischel, supra note 10, at 710–11, argue that sharing in this manner will lead target shareholders to conclude that the bidder values the firm at more than the tender offer price, since it will only profit from appreciation in the shares of the target. This will, these authors argue, provide incentives for target shareholders to “free ride” on the expected efforts of the bidder and fail to tender their shares, thus frustrating an efficient takeover. While this may be true, if shareholders can expect an immediate rise in the target firm's share prices after the tender offer, the evidence is to the contrary. Bradley, supra note 33, at 345–46, observes that bidding firms suffer a 13% capital loss on the shares they acquire by tender offer, which can be explained by a post-tender offer decline in target firm share prices in anticipation of a takeout at a lower price. Bradley concludes that bidders do not expect to profit from postexecution appreciation of the market value of the target's shares. Id. at 355, 364. My own conclusion would be stronger: that bidders do not wish to see such postexecution appreciation occur, since it may increase the cost of a takeout. A contractual device assuring some approval of the terms of the takeout provides no absolute assurance about price, although it does reduce the risk faced by target shareholders that the price will be a low one.Google Scholar

178 See Gilson, supra note 26, at 784–85 n.41. It is not surprising, then, that the number of “beachhead” acquisitions of blocks of stock representing less than a majority of the target shares has increased. Tobin, James M. & Maiwurm, James J., Beachhead Acquisitions: Creating Waves in the Marketplace and Uncertainty in the Regulatory Framework, 38 Bus. Law. 419, 420 n.6 (1983).Google Scholar

179 Where a bidder expects to complete a takeout merger immediately after a successful tender offer, it is possible to obtain considerable evidence about the likelihood of shareholder ratification from the amount by which the original tender offer was oversubscribed, although the takeout may offer a different form of consideration.Google Scholar

180 See, e.g., Model Business Corp. Act. § 75 (1979); Del. Code Ann. tit. 8, § 253 (1974 & Cum. Supp. 1982).Google Scholar

181 While a merger must set identical terms for all shareholders of the same class, a takeout merger can compensate holdout shareholders at a price above the tender offer price, without requiring additional payments to those who previously tendered. In contrast, if a bidder wishes to raise the price offered after some shares are tendered, § 14(d)(7) of the Williams Act, 15 U.S.C. § 78n(d)(7) (1976), requires payment of the increased consideration to those who have previously tendered.Google Scholar

182 See Hochman & Folger, supra note 26, at 553–55.Google Scholar

183 See, e.g., Article Nine of Sabine Royalty Corporation's Articles of Incorporation, reprinted in 1 Lipton & Steinberger, supra note 17, at 267–68 (merger consideration must bear same relationship to premerger market price as bidder's highest purchase price bore to pre-tender offer market price).Google Scholar

184 See, e.g., id. (merger consideration may not be less than the highest per share purchase price paid by a controlling shareholder in acquiring its holdings). See also Aranow et al., supra note 17, at 196.Google Scholar

185 See, e.g., Article Nine of Sabine Royalty Corporation's Articles of Incorporation, reprinted in 1 Lipton & Steinberger, supra note 17, at 267–68 (merger consideration may not be less than the product of the earnings per share of the stock of the company for the last four quarters multiplied by the higher of 15 or the price/earnings multiple on the record date of the common stock of the “acquiring entity,” as customarily computed and reported in the financial community). One author points out that provisions for adjustment to reflect changes since a tender offer in firm earnings only provide for upward, not downward, adjustments. Buford, supra note 164, at 1,354.Google Scholar

186 Here there is a risk of a free rider problem of the type described by Easterbrook & Fischel, supra note 10, at 710–11, and Grossman & Hart, supra note 115. A widely held belief by target shareholders that the takeout price will exceed the tender offer price will lead to withholding shares from the bidder in the hope of receiving the takeout price and thus defeating the tender offer.Google Scholar

187 This is a once and for all type of problem. If a formula is adopted that creates such a free rider problem, the lowered probability of a takeover, in the presence of agency costs that could be reduced under other ownership, should lead to a decline in share prices for the firm. Similarly, adoption of an inappropriate “fairness” formula by the court could lead to the same kind of decline for all shares of such firms. If the problem is serious enough, market forces may cause a substantial decline in the value of the shares of a single firm adopting such a formula. This decline may compensate potential bidders for the increased costs of a two-step takeover. Bidders may be deterred from a takeover by tender offer and takeout merger and will consider other means, such as arm's length mergers, where side payments are made to incumbent management. Once the firm is acquired, such inefficient merger formulas can be expected to disappear. Judicially adopted fairness rules, on the other hand, will not disappear so readily. Even such a modest limitation as Easterbrook & Fischel suggest might reduce the expected value of a firm owned by those who prefer risk, since it would limit the risk that could be borne by shareholders interested in attracting tender offers.Google Scholar

188 Some formalistic problems surround such delegations if they are attempted in their purest sense. While powers of sale or powers to vote shares are permissible, they must be coupled with an interest to be irrevocable, which would be an essential condition to obtain total coordination in negotiations. 1 Restatement (Second) of Agency §§ 138–139 (1958). Whether a mutual desire to benefit all members of a potential selling group is sufficient “interest” to support such an irrevocable power is uncertain in some jurisdictions. Compare Ringling Bros.-Barnum & Bailey Combined Shows, v. Ringling 29 Del. Ch. 318, 49 A.2d 603 (1947), rev ‘d on other grounds, 29 Del. Ch. 610, 53 A.2d 441 (Sup. Ct. 1947) (implied proxy sufficiently supported by an interest to be irrevocable), with Roberts v. Whitson, 188 S.W.2d 875 (Tex. Civ. App. 1945) (mutual promises insufficient consideration to support irrevocable pooling agreement). Assuming that a power could be made irrevocable, such a power of sale might be treated as a consent restraint on the transfer of shares and could provide that no single shareholder could sell his or her shares under certain circumstances without the consent of another individual or of a group and thus create a veto power and what some courts might consider an unreasonable restraint on alienation. Cf. Rafe v. Hindin, 29 A.D.2d 481, 288 N.Y.S.2d 662 (1968). Consent restraints on the shares of publicly held corporations could face similar difficulties. Powers of sale would create heavy transaction costs. Each transfer that did not involve an acquisition by a purchaser attempting to gain control would necessitate having a new shareholder execute a new power of sale. Consent restraints would be similarly cumbersome, even if imposed by articles of incorporation, since each noncontrol transfer would require permission.Google Scholar

189 See, e.g., Model Business Corp. Act § 71 (1979); Del. Code Ann. tit. 8, § 251(b) (Cum. Supp. 1982).Google Scholar

190 See Hochman & Folger, supra note 26, at 551–52.Google Scholar

191 See, e.g., Proxy Statement of Executive Industries, Inc. (May 30, 1979), reprinted in 2 Lipton & Steinberger, supra note 17, at L-3: “While it is recognized that all tender offers are not made with the intention of eliminating minority shareholder interests and that the terms offered may be fair, the Board of Directors nevertheless believes that the terms of a non-negotiated takeover may often be less favorable to the shareholders of the target corporation than those which might be obtained in a transaction negotiated by its board of directors.”.Google Scholar

192 See Manne, supra note 31, at 1433, and id., supra note 16, at 117–19. While the costs of disloyalty may be substantial, rational shareholders should be willing to permit that amount of disloyalty which minimizes the total cost of selling the firm, which is the sum of shareholder coordination costs and agency costs under these circumstances.Google Scholar

193 Brudney & Chirelstein, supra note 5. See also Bebchuk, Competing Offers, supra note 3, and Lowenstein, supra note 3.Google Scholar

194 Bebchuk, Reply, supra note 3, at 39–41, is also concerned that uncontested bids permit allocations of resources to firms that do not value them as highly as other potential bidders might. His analysis ignores the likelihood that where searching activities are conducted by brokerage firms, these firms will attempt to seek the most likely successful bidder, which would be the firm that values the target's assets most highly.Google Scholar

195 Text supra at notes 164–66 and 182–87.Google Scholar

196 Supra note 192.Google Scholar

197 If markets for information are efficient this is unlikely. Linn & McConnell, supra note 161, report 388 firms adopted some form of antitakeover amendments, including varieties not described herein, in the period 1960–80. A recent study by the law firm of Fried, Frank, Harris, Shriver and Jacobson reports that supermajority amendments were adopted at 45 of the 47 annual meetings where they were considered in 1983, and other amendments were approved at 55 of 59 such meetings. Maryland Bill on Takeovers Spurs a Fight, supra note 138.Google Scholar

198 Where gains are obtained by displacing inefficient management, bidders may be limited to firms with management who possess the specialized skills and background required to improve the target's management. Where gains are obtained through synergy, presumably a limited number of firms will possess the particular combination of lines of business, markets, specific assets, etc., required to obtain the increase in value. But where inappropriate (inefficient) shareholder voting rules and coordination devices represent the only depressant on the price of a firm's shares, the number of prospective bidders with the ability to increase the value of the firm is limitless.Google Scholar

199 Note that a legal prohibition of shark repellents would amount to a determination that current statutory minimums represent the Pareto optimal decision rule under all circumstances. Evidence that a reduction from two-thirds to simple majority rule harmed firms when Delaware altered its statute appears in Linn & McConnell, supra note 161. If these minimums are in fact inefficiently low for takeovers, more complaints of unfairness and demands for legal enforcement of sharing rules against successful bidders will be heard from minority shareholders. Thus one ill-considered rule may lead to the adoption of a second.Google Scholar

200 Those investors who were shareholders at the time inappropriate rules were adopted may have suffered a one-time loss in value because of the adoption of such rules. Since many such rules may have existed since incorporation, it seems unlkely that there will be many investors who could make this special argument. Even for these investors, once the value of their shares had dropped to reflect the shareholder action, retention of the shares was an investment decision that, given the market price of the shares, the risk of disparate treatment and of a takeover at a low price was tolerable. Presumably, for a premium they chose not to pay, they could have disposed of their shares and acquired a comparable investment without such risk.Google Scholar

201 See supra note 197.Google Scholar

202 All investors except sole shareholders bear the costs of group decision making, which includes negotiation costs and the risk that decisions will be reached with which the particular voter does not agree. For a discussion of the differences in value that may result because of this, see Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983).Google Scholar

203 Easterbrook & Fischel, Management's Role, supra note 26, at 1175–79, 1188–90, and id., supra note 3, at 4. I do not dispute their general conclusions with respect to defensive tactics other than the coordination devices discussed herein, although so-called “golden parachute” provisions granting management special severance payments in the event of a takeover may dissuade management from resisting takeover attempts.Google Scholar

204 Id., Management's Role, supra note 26, at 1188–90.Google Scholar

205 Id. at 1175.Google Scholar

206 Id. at 1173–74. See also id., supra note 3, at 4, where they state that “any reduction in the return [to bidders] from search is undesirable.” Oniy if curing inefficient decision rules is treated as a wealth-creating transaction can this be true. But a hostile two-step takeover can hardly be characterized as an efficient way to change a voting rule.Google Scholar

207 Grossman & Hart, supra note 115. Easterbrook & Fischel argue that Grossman & Hart's free rider argument is not compelling because bidders can condition a tender offer on receipt of sufficient shares to gain control and can then take out the nontendering shareholders by merger. Easterbrook & Fischel, Management's Role, supra note 26, at 1173–74 n.33. But these authors still argue that it is necessary for bidders to “confiscate the value of untendered shares in order to ensure that all shares will be tendered.”Id. at 1177–78 n.43. This argument is apparently based on the analysis of Grossman & Hart, supra note 115, at 54–58, where they argue that the optimal dilution factor for society in takeovers is infinite. If the takeout price is zero, this argument proves too much.Google Scholar

208 Grossman & Hart, supra note 115, at 44 n.4.Google Scholar

209 Easterbrook & Fischel, supra note 10, at 727 n.75. Elasticity of demand is discussed supra note 61. Elasticity of supply similarly relates the change in the amount of a good supplied to changes in the price offered. Supply is elastic when a percentage change in price is accompanied by a larger percentage change in amount supplied and inelastic when the opposite relationship holds. At any point where two supply curves intersect, the more horizontal curve is more elastic. See also supra note 71. The differences resulting from assumptions about the elasticity of the supply curve with respect to the outstanding shares of the firm are illustrated in the figures below. The acquisition price in a two-step takeover is represented by dd, with one price for a majority of shares and a lower takeout price for the remainder, represented by a jog at the midpoint in the dd curve. The upper figure illustrates Easterbrook & Fischel's argument that no protection is needed for nontendering shareholders (or those whose shares were not fully taken by the bidder), while the lower figure demonstrates that an upward-sloping supply curve creates real gains and losses for target shareholders. See also supra text at notes 65–73. The latter figure also illustrates that whether a particular takeover benefits target shareholders ex post depends on the slope of the particular supply curve and the intersection of the pp curve.Google Scholar

210 Bradley, supra note 33, at 345. See also Jarrell & Bradley, supra note 47. Jarrell & Bradley reported mean tender premiums of 32.4% even before passage of the Williams Act. Id. at 389.Google Scholar

211 See text supra at notes 48–50, and supra note 209.Google Scholar

212 Easterbrook & Fischel, Management's Role, supra note 26.Google Scholar

213 Jarrell & Bradley, supra note 47.Google Scholar

214 Probabilities are the relevant inquiry, since ex ante determinations of the impact of shark repellent amendments on shareholder wealth are the only issue, not ex post determination of results in successful takeovers. The latter excludes the cost of lost takeover bids. I distinguish the demand for takeovers from the demand for shares as financial instruments, as discussed in Scholes, supra note 33. Target firms may possess unique qualities for certain bidders, as in the case of acquisitions motivated by synergy.Google Scholar

215 Linn & McConnell, supra note 161. These authors report that announcement of shark repellent amendments is associated with a positive revaluation of stock prices and conclude that these amendments are proposed by managers and approved by stockholders who seek to increase the value of the firm.Google Scholar

216 DeAngelo & Rice, supra note 124. Jarrell & Bradley, supra note 47, found reductions in tender offers after passage of state and federal legislation that imposed delays and increased costs on tender offers. Salter & Weinhold, supra note 131, at 28–32, suggest an upsurge in acquisition activity since 1975, with the amount of acquired assets relative to existing assets near the average acquisition rate for the 1960–66 period, but far below the 1967–69 period. Id. at 28. Adjusted for inflation, the consideration paid for acquisitions has been rising steadily in the 1975–79 period. Id. at 32. To some extent reports of increased value for shares of firms adopting shark repellents and decreased tender offer activity in the face of higher takeover costs due to enactment of laws regulating tender offers appear to be inconsistent. One possible explanation might be that these shark repellents impose much smaller costs on bidders than state and federal regulation. These shark repellents should deter only those bidders searching for targets where uncoordinated shareholders can be exploited, a relatively small group. Another explanation may be that potential bidders may engage in a search for targets generally, or in an entire industry, and only near the close of the search, after identification of a particular target, discover the existence of a particular shark repellent. If this is true, existence of shark repellents could reduce stock market values generally, while still enhancing the stock values of adopting firms relative to all firms. Much work would need to be done to test this hypothesis.Google Scholar

217 Gilson, supra note 26, at 804 n.109. Gilson's criticism does not apply to the study of Linn & McConnell, supra note 161, which provides more support than DeAngelo & Rice, supra note 124, for the theory that such amendments benefit target shareholders.Google Scholar

218 The perfectly diversified investor, owning stock in both target and bidder in equal proportions, will be unconcerned with the possible magnitude of wealth transfers that may occur in particular takeouts because he expects to be on both sides of the transaction. Thus he will not engage in major portfolio adjustments on the basis of shark repellents. That does not mean that coordination devices may not be of some value to him. The real benefit of the passage of coordinating amendments to this investor will come from elimination of the transaction costs associated with takeovers motivated solely by such wealth transfers. Further, for a well-managed firm, the probability of a takeover will be small, and the expected value of amendments, either beneficial or costly, will be accordingly small.Google Scholar

219 Rational apathy of shareholders was first described by Manne, supra note 31. Manne ‘s description was based largely on the pioneering work of Downs, supra note 152, at 260 ff. See also Easterbrook, Frank H. & Fischel, Daniel R., Voting in Corporate Law, 26 J.L. & Econ. 395 (1983). Linn & McConnell, supra note 161, report that 97% of shark repellent amendments are approved. Gilson, supra note 26, at 824–27, expresses concern that even institutional investors may lack proper incentives to oppose these amendments. But the study Gilson cites, James E. Heard, Voting Policies of Institutional Investors on Corporate Governance Issues, 2, 14–15, 26–27 (Washington, D.C.: Investor Responsibility Research Center, 1981), can be read to support the opposite proposition as readily. As Gilson notes, supra note 26, at 826 n.203, a 1971 study showed that institutional investors regularly voted against management more often on shark repellents than on all but one other type of issue. 5 Securities and Exchange Commission, Institutional Investor Study, H.R. Doc. No. 64, 92d Cong., 1st Sess. 2754 (1971). The Heard study, supra, demonstrates regular opposition to supermajority amendments by a majority of the responding bank trust departments. Id. at 8. Half of the insurance companies responding generally disapproved supermajority voting. Id. at 24. Colleges and foundations, on the other hand, appear more apathetic toward proposals concerning the value of their investments and limit their voting to social and ethical issues. Id. at 31–36. The evidence of mixed voting by those institutions expressing interest in supermajority voting is hardly evidence of apathy; rather it appears to reflect some disagreement (and perhaps uncertainty) about the effect of such voting rules on investment values. That is hardly surprising, in view of the limited empirical evidence to date on the issue and of the disagreement generated concerning its meaning. See, e.g., Gilson's criticism, supra note 26, at 804 n.109, of the study of DeAngelo & Rice, supra note 124.Google Scholar

220 Gilson, supra note 26, at 790–92.Google Scholar

221 Agency costs may be defined as those benefits that agents can divert from owners of assets without contractual specification. The seminal article is by Jensen & Meckling, supra note 78, and demonstrates that it is in the interest of agents to assure investors that agency costs will be limited, since agents will ultimately bear these costs.Google Scholar

222 Jensen & Meckling, id., conclude that it is in management's interest to reduce agency costs by aligning its interests with shareholders and to work out contractual devices to achieve this result. The evidence suggests this is in fact the case. George J. Benston, Accounting for Corporate Governance and Social Responsibility, in Manne, supra note 26, at 70, 85–86, reports that recent studies have shown that the performance of the stock owned by senior officers, in terms of dividends and capital gains, represents a larger amount than salaries. A recent study of management compensation that focuses on the mix of bonuses, stock options, stock appreciation rights, restricted stock and phantom stock plans, concludes that these incentives are also used to align management interests with those of the shareholders. Smith, Clifford W. Jr., & Watts, Ross L., Incentive and Tax Effects of Executive Compensation Plans, 7 Australian J. Mgmt. 139 (1982).Google Scholar

223 Information may be seen as a public good from which others cannot be excluded or, in the case of shareholders, not valuable unless it is shared with other shareholders so they can be persuaded to vote in the appropriate way. Since this sharing is essential and since there is no way for a single shareholder to charge for producing valuable information, others can be expected to free ride on the producer. Since the producer receives only a small fraction of the total benefits from the information, it will be systematically underproduced. See also supra note 122.Google Scholar

224 See supra note 222.Google Scholar

225 Gilson, supra note 26, at 827–28. Gilson's argument is not supported by a study of institutional investors, which have become increasingly wary of shark repellents. Heard, supra note 219. Most banks appeared quite concerned about supermajority proposals, although their responses varied from regular opposition to individual review to approval provided the voting requirement did not exceed two-thirds, or in one case, 70%. Id. at 14–15.Google Scholar

226 Anecdotal evidence from reported cases indicates very high levels of shareholder approval are possible in various fundamental changes. See note 170 supra. If shark repellents accompanied by lock up amendments create inefficient voting rules that are unlikely to be remedied because of shareholder apathy, one might expect the announcement or passage of such rules to reduce stock prices for such firms. The evidence thus far is that this has not happened. See, e.g., DeAngelo & Rice, supra note 124, and Linn & McConnell, supra note 161.Google Scholar

227 Section 14(d)(6) of the Williams Act, 15 U.S.C. § 78(n)(d)(6) (1976), by requiring prorating for oversubscribed offers where shares are tendered in the first 10 days of a tender offer, requires that an offer be kept open for a minimum of 10 days. Under the authority of the antifraud provisions of the Williams Act, § 14(e), id.§ 78n(e), the SEC has adopted rule 14e-l, 17 C.F.R. 240.14e-1 (1982), which requires offers to be kept open for at least 20 days. Delaware requires only 10 days' notice of shareholders' meetings. Del. Code Ann. tit. 8, § 222(b) (Cum. Supp. 1982).Google Scholar

228 Proposals of unduly restrictive voting rules and other shark repellent amendments may signal to other firms that a particular firm is vulnerable to takeover.Google Scholar

229 See Manne, supra note 31, at 1433, and id., supra note 16, at 118. If Maryland's proposed statute, supra note 138, becomes law, managers of Maryland-chartered firms may experience a one-time windfall gain at the expense of shareholders if the statute is unduly restrictive.Google Scholar

230 This evidence is reviewed by Benston, in Manne, supra note 26, at 85–86. A detailed analysis of compensation provisions designed to identify executive interests with those of shareholders can be found in Smith & Watts, supra note 222.Google Scholar

231 Manne, supra note 31, at 1433, argues that target management cannot capture the full control premium sacrificed by shareholders in a merger, because management cannot guarantee delivery of the shareholder vote. This may, as will management's ownership of substantial amounts of stock or its equivalent in the firm, reduce management's incentive to search for the lowest price that target shareholders will accept. Indeed, to the extent that such side payments are conditioned upon ultimate shareholder approval of the transaction, to assure approval of the transaction target management will have an incentive to bargain hard to maximize gains to target shareholders in the merger.Google Scholar

232 See Manne, supra note 31, at 1433.Google Scholar

233 It is odd that critics of shark repellents have not also been critical of those statutory provisions that give directors a veto over mergers and asset sales.Google Scholar

234 The literature in this area is voluminous. It can be said to begin with Berle & Means, supra note 84. Some of the works proposing corporate democracy include Frank D. Emerson & Franklin C. Latcham, Shareholder Democracy: A Broader Outlook for Corporations (Cleveland: Western Reserve University Press, 1954); Lewis D. Gilbert, Dividends and Democracy (Larchmont, N.Y.: American Research Council, 1956); Caplin, Mortimer M., Proxies, Annual Meetings and Corporate Democracy: The Lawyer's Role, 37 Va. L. Rev. 653 (1951). For a critical review of this tradition, see Eugene V. Rostow, To Whom and for What Ends Is Corporate Management Responsible?in Edward S. Mason, ed., The Corporation in Modern Society 46–71 (Cambridge: Harvard University Press 1959); Manne, Henry G., The “Higher Criticism” of the Modern Corporation, 62 Colum. L. Rev. 399, 407–13 (1962); and Easterbrook & Fisch-el, supra note 219. Oddly, the author whose writings created the movement concluded that corporate democracy reforms were futile and that constraints such as those of central economic planning were required to control corporate managers. Adolph A. Berle, Jr., The 20th Century Capitalist Revolution (New York: Harcourt, Brace & Co., 1954), and id., Power Without Property: A New Development in American Political Economy (New York: Harcourt, Brace & Co., 1959).Google Scholar

235 Shareholder democracy is discredited a priori by the shareholder apathy model developed supra text at notes 179–83, as well as by the empirical evidence. See, e.g., Fischel, Daniel R., The Corporate Governance Movement, 35 Vand. L. Rev. 1259, 1276–80 (1982), and Bayless Manning, Review of The American Stockholder, by J. A. Livingston, 67 Yale L.J. 1477 (1958). Benston, in Manne, supra note 26, at 95–96, has documented the disinterest of shareholders in social responsibility proposals. This is not to suggest that votes do not have value; only that proxy contests, where voting counts, are relatively rare when compared to other types of control transactions. A recent study found only 96 proxy fights in firms listed on either the NYSE or AMEX from 1962 to 1978. Dodd, Peter R. & Warner, Jerold B., On Corporate Governance: A Study of Proxy Contests, II J. Fin. Econ. 401 (1983). The value of control (and of the shareholder's vote) rises only as a significant gap develops between the value of the firm under present management and its potential value if managed by a competing management team. See Manne, supra note 31. See also Easterbrook & Fischel, supra note 219. The SEC seems to have reluctantly conceded that shareholders are not interested in governance when it argues that “this may be because there have not been meaningful ways for shareholders to participate in the past.” SEC Staff for Senate Committee on Banking, Housing, and Urban Affairs, 96th Cong., 2d Sess., Report on Corporate Accountability 68 (Comm. Print 1980).Google Scholar

236 Gilson, supra note 26, at 828–29.Google Scholar