March 05, 2005
shareholder choice in corporate law
Posted by David Skeel

Perhaps the biggest corporate law debate in the academic literature these days is the debate as to whether shareholders should have more say when their company receives a takeover bid and on other major issues. There's "meet the new debate -- same as the old debate" quality to the literature, since it's been a staple in corporate law since Easterbook and Fischel started writing over 25 years ago. But it's produced some interesting new insights, including the suggestions by a variety of commentators that giving managers discretion may lead to a better auction vs. negotiated sale decision (Rock/Wachter) and that in a shareholder choice regime managers may entrench themselves through structural decisions that thwart takeovers (Arlen/Talley) or inefficiently manage to the market (Kihlstrom/Wachter). Shareholder choice advocates (Bebchuk, Gilson, others) contend that shareholder choice would lead to less entrenchment and more efficient governance overall. Whatever one thinks of the current debate (I tend to lean toward the shareholder choice side, but am dubious about using federal regulation to get there -- more on this in an upcoming article), it's important to keep in mind some of the limitations of shareholders as corporate champion. One is that shareholders obviously have a disincentive to stop dubious moves that increase the companies profits, such as the move by Tyco and other companies to incorporate offshore to evade taxes. Second, shareholders have a discentive to vote for some measures that would be good for all shareholders as a class. An example (discussed in Icarus in the Boardroom) is executive compensation. The shareholders of one company would be foolish to vote for strict curbs on compensation at their company if no one else is imposing curbs, since this would make it impossible to compete for the most attractive executives. (Just ask Ben & Jerrys abt this). This is one case where an across the board response is necessary, as with Thomas Schelling's famous hockey helmet example. 

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