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Corporate Defense Law for Dispersed Ownership Nicholas L Hofstra Law Review Volume 30 | Issue 1 Article 2 2001 Corporate Defense Law for Dispersed Ownership Nicholas L. Georgakopoulos Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/hlr Part of the Law Commons Recommended Citation Georgakopoulos, Nicholas L. (2001) "Corporate Defense Law for Dispersed Ownership," Hofstra Law Review: Vol. 30: Iss. 1, Article 2. Available at: http://scholarlycommons.law.hofstra.edu/hlr/vol30/iss1/2 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Georgakopoulos: Corporate Defense Law for Dispersed Ownership CORPORATE DEFENSE LAW FOR DISPERSED OWNERSHIP Nicholas L. Georgakopoulos* CONTENTS I. INTRODUCTION .......................................................................... 12 II. OWNERSHIP DISPERSION AND MECHANISMS OF CORPORATE CONTROL ............................................................. 19 A. Locked Control................................................................. 20 B. Contestable Control ........................................................ 25 m. DEFENSES AND DISPERSION ..................................................... 29 A. DelawareAttitudes: Difficult Acquisitions from DispersedOwners ............................... 30 B. Delaware'sNeutrality to Dispersion-Preserving Changes of Control: Easy Proxy Fights .......................... 49 C. EuropeanAttitudes: Easy Acquisitionsfrom ConcentratedOwners ..................................................... 59 * Professor of Law, University of Connecticut School of Law; Visiting Professor of Law, Indiana University School of Law-Indianapolis; http://www.nicholasgeorgakopoulos.org. I wish to thank Michael Alexeev, John Armour, John Coates, Daniel Cole, Simon Deakin, Mitu Gulati, Henry Hansmann, Bob Heidt, Bob Lawless, J. Mark Ramseyer, Richard Ross, David Skeel, and Jeff Stake, for their invaluable comments; the audiences at the year 2000 annual meetings of the European Association of Law and Economics and of the Canadian Law and Economics Association; and Leo Plank for his guidance through and translation of the German tax reform of 2000. I also wish to advertise the fact that the editing process of the Hofstra Law Review is the best that I have encountered so far, and by a wide margin; Steve Coran painstakingly pursued research that was relevant and complementary to the text while the Managing Editors and staff edited the text with cautious but not excessive respect. My thanks to them cannot be overstated. Published by Scholarly Commons at Hofstra Law, 2001 1 Hofstra Law Review, Vol. 30, Iss. 1 [2001], Art. 2 HOFSTRA LAW REVIEW [Vol. 30:11 IV. WHY DISPERSED OWNERSHIP WITH SEMI- ENTRENCHED CONTROL 9 ........................... ........................... 65 A. DispersedOwnership with Semi-Entrenched Controlas a Preconditionfor the Vitality of the Equity Markets ................................................................ 67 B. Defenses Provide a SuperiorManagement Contract .......................................................................... 78 C. Solving the Collective Action Problem of Adapting to Technological Change................................. 89 D. Market Attraction: Preserving Market Returns ............... 93 V. ARGUMENT SUMMARY AND NORMATIVE IMPLICATIONS ............................................................................ 104 A. Whither Europe?................................................................ 108 B. Whither Am erica? .............................................................. 112 V I. CONCLUSION ............................................................................. 119 I. INTRODUCTION In the eyes of Hollywood and the press, hostile acquirers are personifications of evil. However, if we think of the great hostile acquirers of all ages, hostile acquirers with a long record of violence and predation are often treated better by history. The Roman Empire, Charlemagne, the Great Discoverers and the colonial expansion of the seagoing European powers, engaged in an enterprise very similar to hostile acquisitions. Each one observed resources that were underused because of the technological limitations of their controllers. The new user would take control of the resources, apply the new technology to them, and render them more productive. I must say that Rome's road and aqueduct technology increased the productivity of the resources of the Hellenistic society, despite some destruction of culture and the rolling- in-graves of my distant ancestors. Charlemagne's governance pyramid of feudalism, as distasteful as it may seem in the hindsight of today's democratic and liberal reality, could be argued to be a superior governance technology for the conditions of those times. The colonial expansion of Europe was precisely the application of a multitude of superior technologies to otherwise underused resources. These powers changed the world by accelerating growth. Imagine if the response, in each step, had been analogous to the building of the Great Wall of China. It is worth speculating about the shape of the world http://scholarlycommons.law.hofstra.edu/hlr/vol30/iss1/2 2 Georgakopoulos: Corporate Defense Law for Dispersed Ownership 20011 CORPORATE DEFENSE LAW FOR DISPERSED OWNERSHIP had the defenders succeeded in these and many other instances. Roman roads and aqueducts would not dot the Mediterranean, but more importantly, commerce, growth, and knowledge would not have propagated through the ancient world. Without Charlemagne, the Germanic tribes might have remained just that for quite some time. If the indigenous people of the Americas and the Far East had managed to turn away the colonial powers, many areas might still be in archaic stages of development and welfare. The advancement of knowledge for which we admire these hostile acquirers may be nothing loftier than a direct consequence of a quest for productivity. The praise of historical hostile acquirers for material gains is countered by ire over violence, plunder, and destruction of cultural and social values. Perhaps the targeted societies could have done better if they had a defense system akin to modem corporate takeover defenses. They might have been able to implement new technologies and preserve their cultural, artistic, and social heritage, albeit at the cost of slowing the growth of material comforts. I will make an argument justifying takeover defenses that produce the same compromise. I will argue that the reduction of growth speed caused by defenses is justified from an economic perspective. Pursuing immediate productivity gains at all costs is a simplistic argument, but one that seems to have swept modem corporate scholarship. This simplistic quest for productivity has led numerous academics to argue that defenses are undesirable, either altogether' or at least if they do anything more than facilitate the auction of the target corporation by its management. 2 Investors, however, have refuted these arguments by consistently producing initial public offerings ("IPOs") of corporations that include defensive measures in their corporate fabric.' Furthermore and very notably, shareholders prefer defenses over "golden I. See FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 196-98 (1991); Frank H. Easterbrook & Daniel R. Fischel, The ProperRole of a Target's Management in Responding to a Tender Offer, 94 HARV. L. REV. 1161, 1195 (1981). 2. See, e.g., Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 STAN. L. REV. 819, 867-70 (1981). 3. See LAURA CASARES FIELD, CONTROL CONSIDERATIONS IN NEWLY PUBLIC FIRMS: THE ]IMPLE IENTATION OF ANTITAKEOVER PROVISIONS AND DUAL CLASS SHARES BEFORE THE IPO 2 (Pa. St.Univ. Vorking Paper Series, 1999), availableat http://papers.ssm.com (last visited Dec. 30, 2001); JOHN C. COATES IV, EXPLAINING VARIATION IN TAKEOVER DEFENSES: FAILURE IN THE CORPORATE LAW MARKET 1-2 (Harvard L. Sch., L. & Econs. working Paper Series, Discussion Paper No. 297, 2000), available at http://papers.ssm.com (last visited Dec. 30, 2001); ROBERT DAINES & MICHAEL KLAUSNER, Do IPO CHARTERS MAxmifzE FumM VALUE? ANTITAKEOVER PROVISIONS IN IPOS 4 (N.Y.U. Ctr. L. & Bus., L. & Econs. Working Paper Series, Working Paper No. 99-015, 1999), availableat http://papers.ssm.com (last visited Dec. 30,2001). Published by Scholarly Commons at Hofstra Law, 2001 3 Hofstra Law Review, Vol. 30, Iss. 1 [2001], Art. 2 HOFSTRA LA W REVIEW [Vol. 30:11 parachutes,'" which compensate managers for being taken over. Thus compensated for losing their jobs, the managers' interests would align with those of shareholders. This Article, by finding several advantages in takeover defenses, explains these paradoxical contradictions between theory and practice. For the first time, defenses are shown to be socially desirable from an economic perspective in their own right, rather than a prevention of useless takeovers.6 Even previous studies that attempted to explain the popularity of defenses did not explain their use at the IPO stage, their supremacy over golden parachutes, or their social desirability.! 4. Cf. Jeffrey N. Gordon, Ties That Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 CAL. L. REV. 1, 17 (1988) (noting that the golden parachutes "may reduce shareholder wealth" because
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